More than two-thirds (69%) of respondents have chosen to take their entire pension pot as a cash lump sum since the pension freedoms came into effect in April, according to research by Royal London.
The life, pensions and investment firm’s survey of 800 customers found that just under a third (32%) of these intended to withdraw their money in order to place it all in an alternative savings or investment vehicle. Of this group, 23% intended to place their money in a bank, building society or cash individual savings account (Isa).
A further 16% intended to use the cash to clear their mortgage or other debts in order to improve their funding position.
The average size of pension pot being accessed was £15,500, while the average size of fund being fully encashed was £14,100.
Fiona Tait, pension specialist at Royal London, said: “We are extremely concerned that the findings from the research may reflect a wider industry trend.
“The research indicates that around a third of people who are withdrawing cash do not appreciate that their options could include a switch to a similar investment fund within their existing pension plan without paying the tax charge for full encashment or switch to an alternative provider which allows partial encashment.
“Customers aged over 55 would still have access to their savings whenever they need it and withdrawing money over time is likely to be much more tax efficient.
“Where customers are looking to pay off debts or spend the money on a vital purchase, the tax charge may well be a price worth paying. However, if the intention is for the cash to just stay in a savings account, consumers are potentially paying a tax charge for no additional financial benefit.”
If the pension pot is only worth around £15,000 retirees would be lucky to add a couple of pounds to their pension income each month. It’s not surprising most people are cashing them in to pay off debts, they probably save more on interest charges than they would get paid out as a pension