Retirement savers are ‘bonkers’ to switch their cash from a pension to a bank, says a financial expert.
Andrew Tully, pensions technical director at annuity firm Retirement Advantage was commenting on research that suggests the over 55s are racing to strip cash from their pensions.
Tens of thousands have already withdrawn their 25% tax-free lump sum and now plan to raid their pensions for even more cash, according to a survey by the firm.
Retirement savers told researchers that they saving the money for emergencies (28%) or reinvesting to generate a better return than offered by their pension (28%).
Others are paying down debt (18%) or mortgages (12%), while 14% are investing in shares and 8% in buy to let homes.
Big ticket purchases
Big ticket purchases also account for a large slice of the cash.
Home improvements (17%), gifts to family (8%), a holiday (15%) or buying a new car (11%) are also popular ways to spend a pension windfall.
“While paying off debt can be a good use of the money, stripping out cash from a pension to save it for a rainy day is frankly bonkers,” said Tully,
“You might be surprised at just how much tax you will pay on any withdrawal, before you consider how little interest you will earn on savings now.”
He advocates that retirement savers should take professional advice and look at how spending pension cash will impact on their lifestyle in later years.
Best savings rates
“We need to start a conversation around pensions which gets back to basics,” said Tully.
“People need to remember why they initially saved for the longer term, to pay them a salary in retirement.
“Last year’s pension changes have given people the opportunity to take control, but left to their own devices, many are at risk of making poor decisions. Financial advice should be promoted at every opportunity if people are to avoid costly and irreversible mistakes.”
Independent comparison site Moneyfacts lists the best savings rate as 3.5% from Saffron Building Society; 3.25% from Kent Reliance and 3% from Santander. All are on 12-month deals.
Nottingham Building Society also offers 3.0% on a variable rate savings account until March 2018.
