This time last year the Chancellor George Osborne fuelled a debate after stating “pensioners will be free to spend their pension pots on a Lamborghini” after pension changes introduced at the 2014 Budget came into force.
Given that a 2012 Lamborghini Gallardo Spyder retails for around £120,000.00 obviously not everyone would be able to buy a Lamborghini, even if they were to access their entire pension fund. What it seems Mr Osborne was trying to say was that as a result of the changes for the first time there would be choice, choice as to how much of a pension could be accessed at one time.
The new rules come into effect on 6th April 2015 and mean that people aged 55 and over have the choice to cash in all or part of their defined contribution pension if they wish, rather than buy an annuity that guarantees an income for life.
This is the single biggest overhaul in pension regulations for many years.
A recent survey has indicated that nearly a quarter of all those eligible intend to cash in at least half of their pension pots.
Although an attractive option it is important for pensioners to understand that cashing in their pensions or significant percentages of it is likely to increase their tax liability and furthermore, once the pot runs out and unless there is nothing to replace it some individuals will only have the state pension to fall back on.
Pensioners must also understand that it isn’t going to be a case withdrawing entire sums from the bank on the 6th April, the reality is that it is going to take time and the completion of numerous documents before pension savings can be withdrawn as cash.
Last year Labour’s Shadow Chancellor said “Will people with ordinary-sized pension pots be able and encouraged to withdraw all of their pension savings from their pension pot and either try and invest it themselves or spend it? And if they do, what happens when the money runs out?”
Whether or not an individual chooses to access their pension pot is a matter for them. But with life expectancy increasing and an individual having perhaps twenty or thirty years of retirement ahead of them, whether or not to access the whole lot or a significant chunk of it has to be weighed up against the security of an income for life. That is a huge decision with potentially serious ramifications and it requires careful consideration and in our view, expert advice from a qualified financial advisor.
With all this in mind, you might just want to think carefully before rushing off to buy that Lamborghini!