Savers urged not to blow pensions amid tax warning

The government have urged people not to rush into making decisions now. Picture: Colin Hattersley

As of yesterday, people aged 55 and over have the power to decide what to do with retirement savings that they have spent decades building up.

The change in the rules – announced in last year’s Budget by Chancellor George Osborne – mean the 320,000 people who retire each year with a defined contribution pension are no longer required to use their pension pot to buy an annuity. Instead they can take their money in one go or use it like a bank account and withdraw cash in smaller tranches.

But concerns have been raised, with fears some may fall prey to scams, run out of money too early, or not realise the tax implications of withdrawing money from their pension pots.

The UK government’s free Pension Wise service is offering guidance to everyone eligible for the freedoms.

Pensions minister Steve Webb said yesterday that the Department for Work and Pensions had trained more than 300 staff and he was “confident” adequate capacity is in place.

Urging against any hasty decisions, he said: “We want people to make informed choices. This isn’t a mad scramble rush to do something this morning.”

Echoing comments he made last month about people blowing their pension pots on a Lamborghini, Mr Webb said that people should be trusted with their own pension pots.

Asked if he regretted his Lamborghini comment, he replied: “If you are that person with that large pension pot, you will pay a hell of a lot of tax.

“But it does summarise the fact we are setting people free.”

The tax warning was echoed by Ros Altmann, the government’s business champion for older workers, who said the best advice she could give people was “do nothing”.

She said people would be hit with a “triple tax whammy” if they take their money out – on withdrawal, on a new investment and by the loss of the tax-free status the money had in the first place.

“Leave it there... there are huge tax benefits from having the money in the pension,” she said.

“The idea is you can take your money out, not that you should take your money out. There’s no rush.”

Property investing, holidays, using the money to help family members and reinvesting the money with financial firms are some of the ways that people could use their cash.

Labour’s shadow chief secretary to the Treasury, Chris Leslie, called for a cap on fees for pensioners withdrawing money and the establishment of a working group to examine the danger of mis-selling.

Mr Leslie said: “We are slightly worried that the guidance people need has been hastily cobbled together … We have got to be very careful that we don’t find ourselves being complacent about the risk of mis-selling.”