Those approaching retirement on course for average of £26,000 tax-free lump sum
- More than half (54%) of people in the UK plan to take advantage of the tax-free cash lump sum rules at retirement
- 17% plan to transfer their money into a cash ISA and 15% into a bank account
More than half (54%) of working age people plan to take advantage of rules which allow them to take up to 25% of their pension as a tax-free lump sum at retirement according to new research findings from Aegon’s UK Readiness Report. On average those aged 55-65 have £105,496 saved in pensions which could produce a one off tax free lump sum of around £26,000 which is almost equivalent to the average UK salary*.
Commenting on the findings, Steven Cameron Pensions Director at Aegon said: “The ability to take up to 25% of your pension tax-free has always been a popular option with retirees. The option is intended as an incentive to save through a pension and often allows people to fund the early part of their retirement and to make the most of their new found freedoms. It’s particularly beneficial to those whose retirement incomes are likely to be above the tax-free annual allowance of £11,500**.
“Arguably the decision to take cash this way at retirement has become more complicated since the introduction of the pension freedoms. Previously the majority of people took their cash and then bought an annuity with the remainder. Now people can access their savings in a variety of ways, including by keeping them invested and drawing an income, or by accessing it all as cash either in one or multiple go’s.”
One in six (17%) people accessing tax free cash from their pension will put their savings into a cash ISA and 15% plan to put the money into a bank account. A further 14% plan to use the money to take a holiday, 12% are thinking about purchasing a property and one in 10 will use the savings to clear debts.
Steven Cameron continues: “Retirees need to think carefully when deciding whether to take their maximum tax-free cash lump sum immediately or leave more of their money invested. For some people the cash received is vital to clear debts, perhaps pay off a mortgage or clear a credit card. However, not everyone needs it as soon as they retire and money left invested in the pension will continue to grow tax-free while also offering beneficial inheritance tax aspects.
“Cash ISA rates and returns on savings accounts are at all-time lows, with the combination of inflation and low interest rates effectively eating away at spending power from these accounts. Yet, nearly a third of people plan to put the money in a cash ISA or a bank account and this raises a red flag. Savers have worked their whole life to put money away so should be wary of leaving it languishing in bank accounts which aren’t returning the favour. Delaying taking it until they really need it might be a more sensible option.”
Steven’s top considerations for taking your tax-free cash lump sum:
- Check what kind of scheme your pension savings are held in. The rules for taking a tax-free lump sum are very different for Defined Benefit and Defined Contribution pension schemes.
- Do you need one large lump sum? If you can keep the money invested in your Defined Contribution pension and take smaller amounts each year, you may be able to opt for 25% of each of these payments to be tax-free and this has the added benefit that the remaining money will gain from any investment returns before you take it. You only have this option before you move your pension into an annuity or income drawdown product. Retirees thinking about this should check that their scheme or provider offers this and any associated fees.
- You may be entitled to a higher ‘protected’ percentage tax-free from some older types of pensions – check with your provider or scheme. This may affect how you decide to take your tax-free cash sum.
- Before you put the money in a bank account, review the current interest rates on savings accounts and cash ISAs and compare them to the potential investment returns on your pension savings. Pensions tend to be invested in stocks and shares. Remember, the value of an investment can fall as well as rise and isn’t guaranteed. You could get back less than you originally invested.
- Carefully consider inheritance planning in any decisions about your pension savings. As soon as money is accessed it is then subject to inheritance tax as part of a person’s estate but pension savings are treated differently. If death occurs before age 75 pension savings can be passed on tax-free and if over age 75, tax is paid at the income tax rate of whoever inherits the pension pot.
- This can be a complex area and getting it right can offer real benefits. We recommend seeking professional financial advice.
- ENDS –
Research conducted on behalf of Aegon UK by Censuswide. UK representative sample of 2,004 people. Fieldwork was undertaken between 9 and 12 December 2016.
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Notes to Editors
- In the UK, Aegon offers retirement, workplace savings and protection solutions to around two million customers, and employs more than 3,450 staff. More information: https://www.aegon.co.uk
- As an international life insurance, pensions and asset management company based in The Hague, Aegon has businesses in over twenty five markets in the Americas, Europe and Asia. Aegon companies employ over 28,000 people and have millions of customers across the globe. Further information: www.aegon.com
- Aegon is the Lead Partner of British Tennis.
Aegon is a brand name of Scottish Equitable plc. Scottish Equitable plc, registered office: Edinburgh Park, Edinburgh EH12 9SE. Registered in Scotland (No. 144517). Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number 165548. An Aegon company. www.aegon.co.uk
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