Just how people spend their pension windfalls is gradually being revealed to MPs who have called for evidence to test if pension freedoms are working.
The freedom to spend a pension however the saver wishes was granted in April 2015 amid fear from then pensions minister Steve Webb that some would splash their cash on new, yellow Lamborghini super cars.
The freedoms let pension savers take 25% of their pension as taxa-free cash. The rest is taxed as income.
As you would expect, pension freedoms have triggered some shocking stories of excess as well as some accounts of how the new rules have changed the finances of some people for the better.
Boosting income with AirBnB
The MPs gathering evidence for Westminster’s Work and Pensions Committee’s Pension Freedom Inquiry heard one retirement saver blew £120,000 of a £250,000 pension pot on drinking, gambling and a car.
“If he had not been able to access his pension pot, it’s likely that the years leading up to retirement would have been more stable, as prior to him having access, and following his having spent it all, he has been a stable and ideal tenant,” the committee was told.
Another retirement saver told the committee that he had bought a shepherd’s hut to rent on home rental web site AirBnB.
His £46,000 pension fund would have bought an annuity offering a guaranteed income for life of £1,600 a year. Instead, the hut earns rent of £6,000, taking his retirement income to almost £19,000 a year.
“This is the only decent thing Chancellor George Osborne did for me,” the anonymous 60-year-old told the committee.
Beating lifetime allowance penalties
The MPs also heard how another retirement saver took a lump sum from his pension early, so he could avoid tax charges for breaching the lifetime allowance.
He spent the money on buying a boat, while leaving the rest of the fund invested.
Had he not acted, the fund would have broken through the £1 million pension savings limit and attracted a 40% tax charge.
However, the committee heard moans from several pension savers about HMRC charging upfront tax at t5oo high a rate on the money they took from their funds – only to see the cash refunded several weeks later.
They told MPS HMRC needs to change the rules and speed up refunding the overpaid tax.
