Waging war against pension scammers is so hard because retirement savers are only too willing to reinvest their pots in get-rich-quick schemes that promise to make them more money.
Investing to generate an income is the favoured reason pension savers over 55 take their cash, according to new research.
Broadening their horizons with travel and holidays is next, followed by keeping some cash in the bank for emergencies.
Home improvements, repaying debts and helping relatives were also popular reasons for taking money from a pension.
But some of these are not sensible options, according to investment platform and pension provider Hargreaves Lansdown.
The firm says too many savers overestimate the cash they need on hand for an emergency.
Resist temptation to spend
“It’s important not to be tempted into having too much held in cash, because over time its value could be eroded by inflation. The key is getting the right balance between having a cash safety net, and leaving enough invested to continue to grow throughout retirement,” says the company.
With flexible access, drawing money from a pension takes no longer than taking cash from many savings accounts.
Paying off debts is often a personal choice rather than an economic necessity.
Think about how much servicing the debt costs against how much growth your pension is gaining each year.
Whichever outweighs the other is probably the sensible way to go, but don’t forget the income tax implications of drawing too much money in a single tax year from a pension.
Watch out for tax
“When you withdraw money from a pension, the first 25% is usually tax free, and the rest is taxed as income,” says Hargreaves Lansdown.
“It is added to any other taxable income received the same tax year so will normally be taxed at 20%, 40% or 45% depending on your circumstances.
“For this reason, you should take care when deciding how much to withdraw, and whether you should spread your withdrawals over a number of tax years. This could mean you pay less tax and keep more of your money for yourself.”
The company also cautions against taking too much money too early from a pension.
“Rising prices and longer life expectancies mean you might need more money to maintain your lifestyle,” said the firm.