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Retirees risk pensions rotting in the bank

New pension rules will give savers more freedom over what to do with their retirement funds. But many just plan to stick the money in the bank.

Senior savings

Thousands of people could end up making risky financial decisions as a result of new laws that make it easier to cash in pensions.

Next April, the government is scrapping the punitive high tax charges that currently apply to people who take all the money out of their pension funds when they retire.

Relaxed tax rules

This change is designed to give retirees more flexibility when it comes to deciding how to provide for their old age.

But new research from retirement firm Aegon suggests that many of those who take all the money out of their pensions could end up simply sticking it in the bank.

The firm said that, in a survey, almost half of respondents said they planned to take advantage of the more relaxed tax rules to access their retirement funds early.

But among this group, 44% said they would put the money into a bank account.

Is this a sensible option?

Aegon spokesman Gavin Casey says that putting pension cash into a savings account could prove unproductive.

"It’s interesting that putting the money into a bank account is the first thing people thought of doing if they were to lay their hands on cash from their pension pots,” he says.

"While this is arguably preferable to blowing it all on a sports car, there’s little point cashing in only to leave the money languishing in a low-rate account, especially when you need to secure a regular income.

"It’s important to investigate all options before putting money just anywhere; after all, this money is needed to fund an increasingly longer proportion of all our lives, so the harder you can make it work before then, the better."

Annuity alternatives

Ministers say the new pension rules are partly intended to give savers alternatives to the traditional annuity.

Annuities are used to convert pension savings into a guaranteed regular income for life.

But they have faced criticism recently due to a fall in the rates they offer, as well as the fact that annuity deals are usually irreversible.

At the moment, a quarter of a pension fund can be taken tax-free on retirement, with further withdrawals taxed at 55%.

Stock-market option

Most savers therefore use the remaining three-quarters of the fund to buy an annuity.

From April 2015, the tax rate on this money will fall in line with the individual’s personal rate – 20%, 40% or 45% for the highest earners.

It will also become easier to leave the pension invested in the stock market while taking regular income from it – a process known as drawdown.

So why could taking pension money and putting it in savings account turn out to be a bad idea?

Low savings rates

Firstly, the returns available on cash at the moment are very low, thanks to the low Bank of England base rate of the past few years.

Even for those who are willing to tie their money up for five years, rates are only slightly over 3%. For people who need to make regular withdrawals – as many pensioners do – returns are less than 2% a year.

But the big problem is working out how much money can safely be taken from the account as an income in retirement: after all, none of us knows how long we will live for.

By taking too much income, you run the risk of running out of cash and having only the state pension to rely on. This becomes even more of an issue when interest rates are low, and the savings grow at a slower rate.

Despite its apparent inflexibility, an annuity addresses this problem by promising to pay out a certain level of income until the customer dies.

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Chris Torney

Chris Torney

Chris is the former personal finance editor at the Daily Express. He's been a journalist for more than 10 years and contributes to a wide range of finance and business titles.Read more from Chris

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