It will soon be a year since the government relaxed the rules on taking pension income. Since last April, most people have had far greater choice over what to do with their savings when they give up work.
It is now significantly easier to withdraw money from a pension fund or to leave it invested in the stock market. At the same time, annuities – which had been the default option for most people at retirement – have declined sharply in popularity.
How have people used the new pension freedoms?
So how have people reacted to the new pension freedoms? Well, an organisation called the Pensions and Lifetime Savings Association (PLSA) has just published research that analyses exactly that.
The PLSA looked at the 2.8 million people over the age of 55 who have become eligible to access the money in their pensions at some point over the past 10 months. The study shows that there has been no great stampede to cash in pensions, as some commentators had feared prior to the reforms being introduced.
Most people are still “investigating” their options
In fact, 600,000 savers have done nothing about their pensions in this period, while a further 1.8 million are “investigating” their options as far as turning pension savings into retirement income is concerned.
That a sizeable majority haven’t taken advantage of the new freedoms yet shouldn’t come as too much of a surprise. Bear in mind that many of these people will still be in work, with several years of employment ahead of them: as such, they will generally have little need to use their pensions at this point and will perhaps be more concerned with increasing the size of their retirement fund rather than chipping away at it.
But what about the rest?
Nevertheless, there are around 400,000 savers who have accessed their pensions since last year’s rule changes – and it’s what this group has been up to that is particularly interesting. Almost a fifth say they have spent all of their pension, while 57% have spent some but saved or invested the rest.
The PLSA says that, among the spenders, home improvements have been the most popular use of the pension cash. It could well be that many in this group see their properties as a big factor in funding their retirement – and they may think that adding a conservatory or converting their attic could be a worthwhile investment.
However, turning housing equity into cash at retirement is rarely straightforward – the most common ways are by downsizing or through an equity release scheme. What’s more, research carried out by Zopa in 2014 found that the average home-improvement project had a return on investment of around 80% — which means that the cost of the work was a fifth higher than the typical increase in property value that resulted.
Keeping savings in cash
Another worrying finding of the PLSA’s research was that around 60% of those who had withdrawn funds from their pensions in order to save or invest had stuck their money in standard deposit accounts or cash ISAs.
Here, returns are likely to be minimal. These retirees could be far better off lending on a peer-to-peer platform like Zopa, for example, where annual interest could easily be several times higher, although with lending your capital is at risk.
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