SAVERS have been warned of the “disastrous” consequences of taking advantage of new pension freedoms coming into force next year if they fail to understand the implications.
Fresh concerns have been raised over the consequences of the government’s wide-ranging reforms after a study uncovered confusion over the changes and low awareness of pension tax rules.
The research, by Friends Life, also found that savers in Edinburgh are more likely than those elsewhere in the UK to be what the insurer dubbed “Lamborghini retirees”, using their pension pot for a one-off purchase.
It revealed, too, that 6 per cent of pension investors in the Scottish capital and 4 per cent of those in Glasgow plan to exercise their right to take all of their cash out of their pension, with around a quarter of people in the two cities intending to reinvest that money.
Under the proposals set out in the Budget in March, retirees will, from April 2015, be able to take their entire pension pot as a cash lump sum. As now, the first 25 per cent will be tax-free. However, the cash taken above the 25 per cent will be taxed at the individual’s marginal rate from next April, rather than the current 55 per cent.
But 58 per cent of those surveyed in Edinburgh and 68 per cent in Glasgow did not know they could take the first 25 per cent of pension cash tax-free.
David Still, of Friends Life, said: “Retirees now face a huge range of options. We’ve found that while this is refreshing for some, for others the changes and increased choice have created confusion over what the best course of action should be. We encourage people to seek guidance on what their options are to ensure they are in a position to make an informed decision.”
Derek Stewart, managing partner at SAM Wealth in Glasgow, welcomes the changes taking effect next year. But they will be “disastrous” for those without the knowledge to understand the implications, he warned.
“The majority of people I meet do not have a clear idea as to how much income they will need in retirement nor how much their pension fund will provide, unless it’s from a final-salary scheme,” he said.
“Usually they are shocked at the reduction in their income and only the prudent savers have sufficient funds to cover the shortfall in what they require.”
Those unaware of the ability to take 25 per cent tax-free could lose out needlessly, he added.
“Although 25 per cent of the payment will be tax-free, the balance will be taxed as income. This could result in some pensioners paying higher rate tax on the pension payment which could easily be avoided by spreading the payment over two tax years.”
The risks of people making poor decisions when it comes to accessing their pension are heightened when they don’t take advice, said Stewart.
When Chancellor George Osborne, pictured, set out the proposals, he also pledged that savers would get free and impartial advice on options at retirement. The extent of that guidance and how it is delivered is the subject of debate, with some in the industry warning against pension providers being given the responsibility.
“This is a big decision for people and how they will gain access to professional independent advice is questionable,” said Stewart. “Originally the statement talked of the providers providing free advice – the same providers that couldn’t resolve the annuity issue.”