The vast majority of pension savers will not be exercising their spending muscles, splashing out on fast cars and long breaks in the sun, when the new pension freedoms come into play in April, with their aspirations rooted in ideals of greater judiciousness.
A report from the International Longevity Centre sought to assess the priorities of over 55s in regard to spending their pension, and found that 70% of the sample considered the provision of a guaranteed income for life as the most important aspect of their pension pot. Only 7% of the sample viewed indulging in a luxury purchase such as a sports car or a high-end holiday as imperative, whilst 5% considered the paying off of debts accrued as their choice mode of spending their savings.
From April, individuals enrolled in defined contribution schemes will be able to withdraw their pension savings as they see fit following retirement, as annuities are scrapped in favour of a more flexible method of pension saving.
In a sign of the importance of pension savings to the average worker, over a third of the sample expressed their inability to lose a penny of their pension saving, whilst a mere 7% believed themselves able to cope with a 20% dent into their pot.
A key inference to be drawn from the report is peopleís failure to grasp what they are entitled to in place of annuities, and what an annuity even is. Such miscomprehension so close to the deadline for reform is worrying to say the least, with only 50% odd believing they know what an annuity is ëquite wellí.
Only 40% of the sample of over-55s had made a plan, and many expressed they had no clue as to what steps to take toward their financial freedom post-retirement. A large number of the sample knew they were able to withdraw their entire pension pot in one go, however werenít aware that only the first quarter of their lump sum is tax free, with the rest being taxed at the rate they paid during employment.
Keeping money in your pension pot, and withdrawing it incrementally, remains the best way of shielding your savings from the taxman ñ however a tenth of the sample believed the opposite of this and initially thought withdrawing it all was the route towards the greatest value.
ìEven after decades of pension saving, many people have no understanding of the most important aspects of the pension system, which leaves them at risk of making poor decisions,î said the governmentís business champion for older workers, Ros Altmann.
ìThe opportunity of more freedom and choice in future has the potential to deliver better value from retirement savings, but much work still needs to be done to help savers understand their options.î
From April 2015, the Pensions Advisory Service will offer a telephone-based, free service focussed on providing savers with independent guidance on which options are best suited to their individual needs. Any consumer feeling unnerved by the prospect of retiring and are seeking the best way of turning their defined contribution savings into a retirement income ought to get in touch. If you seek to do this before April, use a FCA approved organisation, such as the Personal Finance Society, to find you a trustworthy financial adviser who can soothe your pension-related angst.
The service provided by both the Pension Advisory Service and Citizenís Advice Bureaux has been termed Pension Wise, and it represents a legitimate, unbiased organisation, a far cry away from the quite staggering number of scammers still at large.
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