Research showing how retirees use their pension lump sums to pay off debt provides an insight into to how pension cash unlocked following the new freedoms available from 6 April 2015 could be used.
Retirees that had taken a tax-free cash lump sum at retirement were asked how they used the money. The research published by MGM Advantage[1] revealed that for 28% of retirees, paying off debt was the priority. 13% said they paid off all or some of their mortgage with the money and 8% used some of the money to pay off credit cards, while 7% paid off other loans.
A clear priority
This research helps paint a picture of the likely behaviours of people who might take advantage of the new pension freedoms. Debt is a clear priority for many people who have spent a portion of their tax-free cash paying off loans, credit cards or their mortgage. It is important to remember that from April, accessing more than 25% of your pension in one go will mean you pay income tax on any withdrawals.
The research also shows how the unlocked pension lump sums will provide a boost to the economy. 12% of retirees used some or all of their tax-free cash to renovate or decorate their existing home, while one in ten (9%) said they had used some cash to buy a new car with the same number treating themselves to a holiday. 15% of retirees chose to invest some of their lump sum in stocks, shares or investment trusts, while 27% put some of their tax-free cash in the bank for a rainy day.
Lack of understanding
The findings shows there is a lack of understanding around the implications for taking the whole pension pot as cash, with 59% of people aged over 55 saying they do not understand the tax implications of such a move[2]. When the tax implications are explained, people are far more likely (83%) to leave their money in a pension wrapper and draw an income as needed, rather than taking the entire pot as cash in one go. 17% say they are happy to pay tax on any withdrawal.
Source data:
[1]MGM Advantage research among 2,060 UK adults aged 55+, conducted online by Research Plus Ltd, fieldwork 4-11 October 2013.
[2]Research carried out online among 1,000 respondents aged 45-65 by Onepoll, all who are paying into a pension. 299 people were aged 56-65. Fieldwork was completed 23-27 May 2014.
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