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14 July 2015 last updated

New pension rules see £1 billion of funds removed at retirement

Since April 2015 more than 65,000 people retiring have taken their benefits out of pensions as a cash sum amounting to £1 billion as new pension freedoms offer greater flexibility although the cash will be subjected to tax at the marginal rate.

Under the new pension freedoms introduced by the Chancellor George Osborne anyone aged over 55 can take 25% tax free lump sum from their pension fund with the balance as a cash sum taxable at their marginal rate.

The freedoms allow the full fund to be taken or portions of the fund at any time, however, not all providers wish to offer the greater flexibility to customers.

Some providers have limited access and others are charging fees to access funds. Many of these legacy providers no longer offer new pension arrangements and have a limited admin facility.

In most cases at retirement funds are converted to an annuity or transferred to a new provider that can set-up varying income options for clients.

Funds removed with new pension rules
  More than £1 billion is taken out of pensions to pay off debt, holidays and make other investments
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No longer necessary to buy an annuity

The main advantage with the new rules is that you are no longer compelled to buy an annuity. There has been a significant change with £1 billion taken as cash in April and May by 65,000 people or an average of £15,500.

Although annuities remains as an option and figures released from the Association of British Insurers (ABI) show that over the months of April and May 11,300 people used £630 million to buy annuities, averaging £55,750.

This compares to 2012 when £1.2 billion a month was used to buy annuities and only £100 million into drawdown.

People can now choose other pension options such as selecting a flexi-access drawdown or a fixed term plan and drawdown was used by 10,300 people with £720 million or an average of £69,900.

For those that take the fund as cash, according to Standard Life the main reason most people is to repay debt such as credit cards or mortgages.

Most of these pension funds are small so after a tax free lump sum the additional income would be taxed at 20% in most cases. About half of all these policies are worth under £10,000 and eight out of ten are worth under £30,000.

Interest in accessing pension funds is also increasing with those with final salary schemes wanting greater flexibility. The valuation for transfer purposes is based on gilt yields which have reduced. This has resulted in many abnormally large fund transfer quotes often 50% larger than a year ago making it attractive to consider this option.

Many consider other investments

Research conducted by providers Liverpool Victoria and Prudential has shown that about 10,000 people cash-in larger funds or made partial encashments of much larger funds.

About 97% of pension funds are valued below £50,000 with 2% between £50,000 and £100,000 and only 1% over £100,000.

The majority, about 45%, use the money to repay debts with another 29% spending the cash on holidays or home improvements and the remaining 26% investing in buy-to-let properties.

As pension funds cannot invest directly in residential property, many people are attracted to the idea of diversifying their investments and take advantage of rising property values and rental income.

Even so these investments can be time consuming and extracting enough cash from a pension without paying higher rate tax may mean spreading the withdrawals over several tax years.

News related stories:
Flexi-access drawdown will be used by 130,000 people says HMRC
Pension savers to receive free guidance when taking their benefits
Budget time table risks delays for changes to drawdown and annuities
Radical changes to pension annuities announced by Chancellor
Related internet links:
Reuters - Pension freedoms sees 1.8 billion taken out
Telegraph - 60,000 unlock pots with new pension freedoms
BBC - New pension rules used by 60,000 people
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