Research reveals DC savers' confusion about tax-free pension cash

More than three-quarters (76 per cent) of defined contribution (DC) pension savers do not intend to use their tax-free cash for retirement income, according to Legal & General Investment Management (LGIM).

Just over half of those who had withdrawn their lump sum said they did not really need as much right away and that they could have taken less, while nearly one-third (29 per cent) said that they could have used other savings, instead of taking the lump sum out of their pension.

The most popular thing to spend the tax-free lump sum on was home repairs and improvements, with this option selected by more than a quarter (27 per cent) of those who had decided to make the withdrawal.

Nearly half (46 per cent) of the group of respondents said they would not have withdrawn their cash if it had not been tax free.

Among those who had withdrawn from their pension, more than a quarter (26 per cent) did this as soon as possible at the age of 55, with many unaware of the potential for growth had they kept their money invested for longer.

LGIM pointed out that withdrawing tax-free cash triggers a saver's Money Purchase Annual Allowance (MPAA), which reduces the annual amount they can pay into their pension tax free each year from £40,000 to £4,000.

Less wealthy savers were found to be particularly confused about tax-free cash and the MPAA, with the research finding that 53 per cent of those with pots of less than £10,000 agreed with the statement that tax-free cash was “there to spend, like a bonus or a windfall”, compared to 30 per cent of those with pots of over £250,000.

LGIM found that, although nearly half (48 per cent) of those with pots of over £250,000 said they believed their lump sum was something to “invest elsewhere, for better returns”, the group was three times more likely to keep their tax-free lump sum in cash rather than invest it.

LGIM co-head of DC, Rita Butler-Jones, said: “Rather than its original intention of incentivising saving, tax free cash allowances appear to have the opposite effect in practice – encouraging members of pension schemes to spend more before they retire and take their tax-free cash savings whilst they still have other sources of cash savings.

“This is a potentially very damaging situation for whole generations of future retirees. Freedom today is hurting freedom tomorrow.”

Butler-Jones continued: “Thinking seriously about pensions needs to start much earlier than the age of 50 or 55 and members need to consider their whole financial picture, including their existing savings, as possible sources of wealth.

“Pensions providers can help by giving members the confidence to not always opt for the ‘cash under the mattress option’, whether that is staying invested for longer or withdrawing in a more tax-efficient way, giving members more financial freedoms for longer.”

    Share Story:

Recent Stories

Responsible investing: Member views
Pensions Age editor Laura Blows speaks to LGIM's co-heads of DC, Rita Butler-Jones and Stuart Murphy, about pension providers and asset managers responsibility to incorporate member views when it comes to their pension and investing it responsibly
Opportunities within asset-backed securities
Pensions Age Editor, Laura Blows, speaks to AXA Investment Managers Alts Co-Head of Securitised & Structured Assets, Christophe Fritsch, and Senior Portfolio Manager for Structured Finance, Xavier Lassau, about the opportunities within asset-backed securities

Advertisement Advertisement