Are you making pension freedom mistakes?

By Ruth Jackson

Last year the Government introduced pension freedoms designed to give people approaching and in retirement far greater control over their pension savings. Now data is emerging that shows that many people are losing out on interest growth and risk running out of money after capitalising on the new freedoms.

How many people are using the pension freedoms?

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Under the pension freedoms anyone aged 55 or over can now withdraw money from their pension pot.

HM Revenue & Customs (HMRC) have revealed that 232,000 people have withdrawn money since the new rules came into effect in April of last year.

What's the problem?

The first issue is how much money is being withdrawn. The Association of British Insurers (ABI) has found that some people are taking far too much money out.

In the first year of pension freedoms £6.1bn was withdrawn at a rate of £27m a day. Between January and March of this year 79,734 pots had money withdrawn from them, according to the ABI. Of those, 57% had less than 1% of the total value taken out. But, 3,300 pensions had 10% or more of their value withdrawn. And some were completely emptied. This could leave people with nothing to live on in later life.

"More than half of [pension] pots are having less than 1% withdrawn per quarter, which seems to indicate most people are taking a sensible approach," says Yvonne Braun, ABI director of policy, long-term savings and protection. "However, there are signs a minority may be withdrawing too much too soon and at rates that would see their money run out in a decade or less, if they are reliant on their pension pot as their main source of income."

"It is vital that people don't dive into their pot too early and risk running out of money," says Trica Phillips in the Mirror. "Get advice from an independent pensions expert about the right time to dip into your savings and the best option for taking your cash. Choices made at retirement cannot easily be undone. Make a mistake and it's a decision that will affect your finances for the rest of your life."

Don't miss out on interest

Another problem is that some people are withdrawing money from their pension only to put it in a savings account where it earns next to no interest. Research by Citizens Advice found that one in three people are putting their pension savings into a bank account.

Steve Webb, the former pensions minister who is now director of policy at Royal London, says people leaving their retirement savings in bank accounts are his "biggest worry".

"The real worry is the money put into current accounts, because they are familiar, which then just sits there eroding," he told The Telegraph. "Even if inflation is low it is higher than interest earned."

What's the solution?

Ask any finance expert and they will tell you that the key to pension success is to get advice. Research by unbiased.com recently found that people who use a financial advisor improve their average monthly retirement income by almost £100, but less than a third of retirees do so.

The Government is now considering allowing pensioners an extra £500 tax-free allowance on their pension withdrawals if they use the money to pay for financial advice.

"Pensions and savings decisions are some of the most important a person will make during their lifetime," says Simon Kirby, economic secretary to the Treasury in the Financial Times. "It is therefore vital that people can access the financial help they need."