Where Should You Put Your Retirement Cash?

A record amount of money has been withdrawn from pension funds over the past three months - what should retirees do with this cash?

Emma Wall 2 August, 2018 | 7:27AM
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Retirement savers have withdrawn a record £2.3 billion from pension funds over the past three months

Retirement savers have withdrawn a record £2.3 billion from pension funds over the past three months - a significant increase from £1.7 billion in the previous quarter.

This jump of 30% sees the most cash withdrawn from pensions over a three-month period since pension freedoms were introduced in April 2015. 

Pension freedoms were announced by then-Chancellor George Osborne in the March 2014 Budget and actioned at the beginning of the 2015/16 tax year. At the time Osborne billed it as a release from the constraints of poorly paying annuities, allowing every pension saver access their defined contribution pension savings as they wish, subject to their marginal rate of income tax.

Many praised the move as an end to the nanny-state; Malcolm McLean, former head of the Pensions Advisory Service, said the government was "treating people like adults, allowing them to spend their own money how they please in retirement.”

Before the freedoms were introduced it was compulsory to buy an annuity at retirement unless you could prove you could provide yourself with a considerable income through your retirement. But as annuity rates are lined to the 10-year Gilt yield, record low bond yields have meant the pay-outs have dropped significantly.

It is a complex issue; there is no one-size-fits all retirement solution. In theory, freedom is a good thing – it should increase competition among pension providers, allow individuals to better manage their estate, promote intergenerational financial gifting and simply allow hard-earned savings to be enjoyed by the hard-working saver.

But detractors say that a low income is better than none - the risk that allowing pensioners access to their retirement savings will result in pots drying up as individuals mis-judge their financial requirements. And they cite the most recent figures – £2.3 billion withdrawn in the three months to the end of June, in 574,000 payments by 264,000 individuals – as evidence of this.

We consider some of the options available below. Remember, if in doubt what the best financial solution for you is, always seek independent financial advice.

Take the Cash

£2,300,000,000 divided by 574,000 payments is an average withdrawal of £4,006 – the cost of a good cruise. While averages may not be an accurate representation of behaviour, there is an argument to be made that sums this small are better put to use on a single, enjoyable, endeavour than invested for income.

After working hard for 40 years, diligently saving for retirement, shouldn’t individuals be allowed to enjoy their industriously-gotten gains? If you have long dreamed of taking a cruise, or the thought of home improvements have gotten you through the last decade in the office, now may be the best time to do it too, according to stock market valuations. US, European and UK equity markets have enjoyed a considerable rally since the financial crisis, and it would be savvy to crystallise gains before market cycle runs its course.

However, this should only be considered an option if you have an alternative dependable source of income for the remainder of your retirement.

Stephen Lowe, at Just Group counters: “We need to remember that small pension pots can make all the difference to raise peoples’ monthly living standards. Our analysis shows it only takes a pension pot of around £14,000 to lift a single retiree, in receipt of State Benefits, above the Joseph Rowntree Foundation’s Minimum Income Standard, the lowest income people think provides an acceptable standard of living.”

Reinvest in a Tax Efficient Way

The most recent figures from HMRC include the first week of April – the end of the 2017/18 tax year and the beginning of 2018/19. This is the busiest week of the year for investment platforms, as individuals rush to take advantage of their SIPP and ISA allowances.

Tom McPhail, of Hargreaves Lansdown commented: “Withdrawals are spiking around the end of the tax year, suggesting investors are planning their income to make the most of their allowances and tax thresholds.”

Self-managing a financial pot as important as your pension may be daunting – and ill-advised – for many individuals, but for those already running a successful portfolio, topping it up with cash from their workplace pension is a savvy move. It is worth noting that while you can transfer a workplace pension directly into a SIPP, there are tax implications of withdrawing pension cash to deposit in an ISA.

Consolidate Your Assets

Long-gone are the days where individuals got a job for life – 40 years with one employer, and an attractive gold-plated pension for the remainder of your days. The average Brit now works for six different companies – and makes 29,328 cups of tea, take 94 days off sick and be late 141 times – according to AAT. And this number is rising, meaning a rising number of small, static, pension pots. If this is the case for you, examine the returns mastered by your various providers over a market cycle; does one significantly outperform the other?

It could be savvy to consolidate these pots and reward the better performer with more of your savings. This assessment is best done by a professional, so be sure to take advice before making a transfer.

Leave it Where it Is

Happy with your pension provider? No immediate need for ready money? Often the most sensible approach to your pension pot on reaching retirement is to leave it where it is. It benefits from professional asset allocation, tax-efficient status and a government-capped low annual management fee. Why mess with a working formula?

Take a bucket approach to retirement finance; a pot of cash for every day spending, an ISA for intermediate needs, and a leave-it-be pension for long-term, as yet unknown requirements. Be tax-savvy; you don’t pay income tax on ISA investments, but you will if you drawdown your pension.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Wall  is former Senior International Editor for Morningstar