People tend to value convenience and the path of least resistance, but this could be putting their retirement at risk, advisory firm LCP has cautioned.
One of the biggest incentives for people to access their retirement pots is the 25% pension commence lump sum (PCLS) – which is tax free.
But the big question is what happens to the remaining balance?
All of nothing
According to LCP partner Steve Webb, there are two typical outcomes.
“To get the 25%, people take all 100% – in other words, they cash out in full; in the most recent six months, when 317,000 pots were accessed for the first time, more than half – 174,000 – were cashed out in full; the problem then is what they do with the other 75%?
“The evidence is that it is most likely to end up in a current account, cash Isa or low interest savings account. If it sits there briefly that’s probably not much of a problem, but if they access their cash at 55 and the rest sits there earning 0.1% for the next 10-20 years that’s a very bad outcome indeed.”
The second outcome is to take all the tax-free cash and move the remaining 75% into a drawdown account.
“Whilst that’s better than being in a cash Isa, it’s likely to be worse than if the money was still in your pension,” Webb added.
“Chances are that in your pension it was in a workplace mastertrust, with good governance and a charge cap.
“When you move to drawdown you are paying ‘retail’ prices, rather than ‘institutional’ prices, for your product, and there’s no-one helping you manage the funds from then on.”
Solution?
The comments from Webb were in response to a Department for Work and Pension Select Committee inquiry into pension freedoms.
Fellow LCP partner Laura Myers added: “Pension freedoms give savers welcome new choices but there is a risk that current rules for accessing tax-free cash are leading to poor consumer outcomes.
“Many people who want to access their tax-free cash find it easiest to cash out in full, but then put the balance in a cash account, losing out on vital investment growth on the balance of their funds.
“Even those who put the balance into drawdown risk moving into a higher cost environment with lower returns and poorer governance. Changing the rules to allow people to access their tax-free cash and leave the rest in their pension fund could be the best of both worlds.”
