One in eight people using new pension freedoms to access their retirement savings are being caught out by unexpected taxes and cuts to benefits, according to new research from Citizens Advice.
New figures released by the charity today (Thursday) reveal that 9% of people accessing their pension pots have been met with unexpected taxes, rising to 30% among those who have taken their whole pension pot.
The research, which forms part of Citizens Advice’s new ‘Life after pension choices’ report, also found that 6% experienced problems with their benefits, such as a reduction in payments. Citizens Advice says this is a common problem among people with pension pots of less than £20,000, with 11% of these people reporting unexpected problems with their benefits.
Only 64% of people who experienced tax or benefits problems were able to resolve the issues they faced. However, 87% of these say they were able to do so easily.
Three in five people who have withdrawn money from retirement savings have no plans for how they would pay future care costs. The report found just 16% have budgeted for care costs and only 23% had given any thought to a possible ‘backup plan’, such as equity release or selling their home.[contextly_sidebar id=”qY0ED0QuRKqQNmJ2lnRl7kXEibVm0d5O”]Worryingly, 60% haven’t even considered how accessing their pension pots now could mean they’ll be unable to afford future care costs.
However, 35% of people accessing their pension pots say the new freedoms have improved their retirement prospects, with 87% of these welcoming greater control over their own money. 50% said it would help them to remain healthy in retirement. Only 5% say they have been left worse off.
Record low-interest rates of just 0.25% mean many people are now transferring money from their pension pots to a bank account. The report from Citizens Advice shows the way people used money taken from their pensions varied. But the majority either depositing it into a bank account (29%) or used the money to pay for daily living costs (29%). Less than one in ten chose to invest the money (18%), while 16% used it to pay off debts.
Chief Executive of Citizens Advice Gillian Guy said: “The pension freedoms are popular with consumers but some people are experiencing unexpected losses.
“The changes are giving huge numbers of people the choice of how to access their retirement savings, offering them more options about how to use the money to best fit their lives.
“With annuity rates falling, uncertainty around returns on drawdown products and the drop in interest rates many are opting to manage their savings themselves, through bank accounts or investments. Others are taking the opportunity to clear debts which would otherwise hang over their retirement.
“In a minority of cases people are being caught out by unexpected consequences of using the pension freedoms, such a being hit by tax deductions or a cut to their benefits.
“As people’s pension choices become more complicated government and providers need to continue their work to promote free Pension Wise guidance, ensuring people are fully informed about their options as they move from work into retirement.”