There was an almighty hoo-ha when George Osborne introduced pension freedoms. In the biggest change to pensions in a generation, anyone aged 55 and over is now allowed to take their entire pension pot as a lump sum, paying no tax on the first 25 per cent and the rest taxed as if it were a salary at their income tax rate.
I was among the naysayers and one of those who thought the then Chancellor was absolutely bananas for implementing the new rules. The temptation to blow the lot on a round-the-world cruise or a fancy car must be overwhelming, and falling back on the State in later years will be no picnic.
But among all the fanfare surrounding pension freedoms, the long-held ability to take a quarter of your pension as a tax-free lump sum – and what to do with it once you’ve got it – has been largely overlooked. New research from Aegon reveals that more than half of working age people plan to take advantage of this, freeing up around £26,000, nearly the equivalent of the average UK salary.
In its UK Readiness Report, Aegon calculates that, on average, those aged 55 to 65 have £105,496 saved in pensions (hence the £26,000 payment). Steven Cameron, pensions director at Aegon, said: ‘The ability to take up to 25 per cent of your pension tax-free has always been a popular option with retirees. The option is intended as an incentive to save through a pension and often allows people to fund the early part of their retirement and to make the most of their new found freedoms. It’s particularly beneficial to those whose retirement incomes are likely to be above the tax-free annual allowance of £11,500.
‘Arguably the decision to take cash this way at retirement has become more complicated since the introduction of the pension freedoms.