Pensions reform: Lump sums don’t mean Lamborghinis as Britain’s savers are still being prudent

 
Annabelle Williams
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Six months have passed since new pension freedoms came into effect
Pensioners were expected to be buying up Lamborghinis in droves this summer, after landmark pension freedoms came into effect in April.
The new system allows people over 55 to take some – or even all – of their pension as a lump sum. It wipes away old restrictions which only let retirees have a quarter of their savings at once.
There were fears some people would blow the lot on a Lamborghini, said former pensions minister Steve Webb. The Italian sports car costs around £150,000 to buy new.
That prediction hasn’t come to pass – mostly because if you took a lump sum big enough to buy a Lambo from your pension pot, you would pay so much tax you could only afford a Porsche, says Maike Currie of Fidelity Personal Investing. Only 25 per cent of the pension pot can be taken tax-free, anything above that is taxed at the individual’s rate of income tax.

SPLASHING THE CASH

Six months on from the biggest changes to pensions in 50 years, and the reality has been far more sober. Of the people choosing to take all their pension as a lump sum, 50 per cent have less than £10,000 saved, according to research from Fidelity.
But many people have been taking tax-free chunks out of the savings pots. Around £1.3bn was taken out of people’s pensions in the first few months of the freedoms, said the Association of British Insurers.
The average per person is £15,000 – a fairly modest amount which shows the government was right to think pensioners could be relied upon to use their savings responsibly.
But the reason for taking chunks out of the pension pot is less positive. Many pensioners fear the government will backtrack, as it makes frequent small tweaks to the system.
“People are concerned the government might change the rules so they are taking out cash lump sums,” Currie explains. “There are no rumours that they will, but the rules do change all the time.”

BUY TO LET BOOM

The sudden availability of a large pot of cash alongside the seemingly lucrative appeal of the buy-to-let market means many experts were predicting a boom in the numbers of older landlords ­– or “granlords”. Building society Nationwide altered its lending criteria to offer mortgages to people up to age 75.
The boom is yet to materialise, but there is likely to be a steady rise in the number of people living off property income.
Indeed, over-55s will be responsible for 3m future property deals, research from Prudential found, with nearly 40 per cent of homeowners over 55 planning at least one more property purchase.
The coalition government’s reforms were radical and popular. We are yet to see the full extent of how people adapt to having more freedom over their pension pots.

Pension freedoms six months on

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