Withering on the vine
New Citizens Advice research reveals three in ten people using pension freedoms have put retirement savings in a bank account.
A third of people who are withdrawing cash from pensions worth over £100,000 are simply transferring the money into bank accounts, according to Citizens Advice.1
The Life after pension choices report, which was published last week, comes almost 18 months after people were given more choice about how to use their pensions.
But the findings have alarmed many financial experts, who warn that cashing out and keeping the proceeds in low interest accounts will mean retirees miss out on the returns they could get if they left their pot invested.
Following the Bank of England’s decision to cut interest rates to an all-time low of 0.25% in August, banks have been quick to reduce savings rates still further. Santander announced the interest rate on its popular 123 current account will halve in November. NatWest recently reduced to just 0.01% the interest rate on its Cash ISA for deposits of less than £25,000.2
Illusion of safety
“People might think that putting their pension savings into a bank account is the safest option, but it suggests they are going without financial advice. At current rates of interest, money in the bank will simply wither away once the impact of inflation is taken into account,” says Ian Price, Divisional Director at St. James’s Place.
“If people want to retain control of their pension pot [rather than use it to buy an annuity] they need advice on leaving it invested, so that it keeps pace with inflation and sustains them throughout retirement,” he adds.
The research explores other choices people have made with money withdrawn from their pension:
- 29% use the money to pay for daily living costs.
- 18% invest the money.
- 16% use the money to pay off debts.1
The figures also reveal that 9% of people had unforeseen tax problems after accessing their pension, such as tax deductions they weren’t expecting. This rises to 30% among people who took their whole pension pot in one go. A further 6% reported that their benefits had been affected. 1
“The report suggests that a lot of retirement planning is done in people’s heads, or not at all. It’s imperative that people seek the right information and advice, especially those who have yet to make a decision about their pension pot,” says Price.
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