Pensions: Save or splurge?

Will you be splashing out on a Lamborghini with your pension pot next year? Vicky Shaw looks underneath the bonnet of the retirement savings revolution

The Government believes few people will choose to blow their pension on big ticket purchases, while most will welcome the new financial flexibility
The Government believes few people will choose to blow their pension on big ticket purchases, while most will welcome the new financial flexibility

The biggest pensions shake-up in a century is just around the corner, so it's important you know what to expect.

Here’s a potted guide to the pensions revolution:

What’s the purpose of the reforms set to come into place next April?

Very broadly, firstly, they aim to give people who are saving into a pension confidence that their scheme will give them good value for money.

Secondly, when people come to retire, they will have much greater freedom and flexibility to spend their pension pot on what they want, when they want to.

This confidence in retirement saving is vital, as millions of people are now being automatically placed into workplace pension schemes, after automatic enrolment into pensions was introduced to head off a potential old age savings crisis (with people living longer but not necessarily putting enough money aside to enjoy a comfortable retirement).

What will the reforms entail? From April 2015, around 320,000 people retiring each year with defined contribution (DC) pension savings will have a greater ability to take their pot how they wish.

People aged over 55 will be able to take their pension pot subject to their marginal rate of income tax in that year, rather than the current situation where they are charged 55% tax if they withdraw the whole pot.

They will also be able to use their pension pot like a bank account and withdraw sums in a series of slices, with 25% of each slice being tax-free.

Previously, people approaching retirement have felt forced to use their savings to buy an annuity, which provides a guaranteed yearly payout. Annuities, which are usually a one-off, irreversible decision, have been controversial in recent years people not always choosing the best deal for their circumstances.

For people who are saving into a pension, the Government also intends to press ahead with plans to stamp out “rip-off” charges which could gobble up their pension savings. This will mean a 0.75% cap placed on charges for managing pots.

Seemingly tiny changes to the charges imposed for managing pots can make thousands of pounds’ worth of difference to the amount of money a saver ends up with.

What guidance will people get on what is right for them?

Citizens Advice will give free face-to-face guidance at its bureaux across the UK. Guidance will also be available over the telephone from the Pensions Advisory Service (TPAS). An online service will also be designed as part of the guidance scheme. Some people may also want to pay for in-depth financial advice.

How have the reforms been received?

While they’ve been broadly welcomed, concerns have been raised about firms being geared up in time to help people make the most of the changes. The Government argues the reforms will give people responsibility for their nest eggs, but critics fear some people may squander their savings.

So, what will people do with their money?

Pensions Minister Steve Webb famously said he was “relaxed” about the possibility of people spending their savings on a Lamborghini sports car. He acknowledged that someone will “blow the lot and wish that they hadn’t”, but also said he prefers to “trust people with their own money”.

With the new options around being able to take money out of their pot in slices, some people may also choose to keep portions of their money invested for longer. New, more flexible pension products are also likely to be in the pipeline.

There have also been suggestions that more people may invest in doing up their home or purchasing a buy-to-let property. And some people may still want to buy an annuity, which guarantees they won’t outlive their savings.


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