Pension glitches prove a growing concern (Birmingham Post Article)

The Government’s much-vaunted pensions freedom legislation is increasingly resulting in worrying side-effects.
Critics claim too many people are cleaning out their pension savings, not taking financial advice, failing to invest it wisely and paying too much tax.
There was concern at the outset that the temptation would be to blow the money on the proverbial red Ferrari, and, while that is largely a myth, the system is failing to work as successfully as had been hoped.
According to the Financial Conduct Authority, accessing pension pots early has become “the new norm”.
When you take money from your pension pot, 25 per cent is tax free. You pay income tax on the other 75 per cent. The amount of the tax hit depends on your total income for the year and your tax rate.
So it can cost you dear yet this is not deterring the significant numbers choosing to take all the benefits from their fund in one go. Since April 2015 over-55s with a “defined contribution” pension have been able to do so in a single swoop or several lump sums. Previously, almost everyone simply bought an annuity, a contract that pays a guaranteed income for life.
More than a million people have obtained pension cash, taking a total of £10.8 billion, or £10,800 on average each.
Almost three quarters (72 per cent) of pots that have been accessed were by consumers under the age of 65, the majority choosing to take lump sums rather than a regular income.
Most pension pot raids were for comparatively small amounts – 90 per cent were below the value of £30,000. And that is perhaps understandable where taking the money now can be a real help as against the limited pension it would buy. Indeed, 94 per cent of consumers making full withdrawals had other sources of retirement income in addition to the state pension, the FCA found.
But, surprisingly, the regulator also discovered that 52 per cent of fully withdrawn pots were not spent but were moved into other savings or investments (so not that fabled dream car, then!).
Some of this was due to a lack of public trust in pensions, it said.
Perhaps a reflection, one might speculate, of all the pension scandals that have hit the headlines over the years, coupled with the terrible image of the banking sector.
But the result could be “consumers paying too much tax, missing out on investment growth or losing out on other benefits”, cautioned the FCA.
And, in general, denuding yourself of a pension in later life is a very bad idea.
I can see the benefit in certain circumstances of people wanting to exhaust their pension fund over a short term, for example somebody in serous ill-health.
Otherwise, they should think very carefully about whether they are doing the right thing.
If they still insist on going ahead individuals should consider withdrawing their pension funds over tax years to utilise the £11,500 personal allowance or target the withdrawal to remain within the basic rate band for income tax.
Beware too HM Revenue & Customs taking off even more tax than the amount they are due – down to the complex workings of the pay as you earn (PAYE) system which may put you onto an “emergency tax” basis.
Victims will eventually get their money back, promises HMRC, but it may take time.
The FCA says it is keeping a close eye on developments and has identified areas where early intervention may be needed.
Given the huge changes in the pensions sector getting everything right first time was never going to be easy.