What price pension freedom?

Inflation is driving many to raid their ‘rainy day funds’ to cover rising energy and fuel bills. But there are particular concerns that some older savers are also cashing in pension funds early to help make ends meet in the short term, with potentially long-term consequences.

Under Pension Freedom rules anyone aged 55 or over can currently access their pension funds. While a quarter of these funds can be withdrawn tax-free, the rest is potentially subject to income tax.

Since the introduction of pension freedoms, largely buoyant stock market gains combined with low inflation meant pension holders could draw money from these pots without seriously depleting the remaining, still growing funds.

However, a new report from actuaries AKG highlights how the return of high inflation and increased living costs could jeopardise many people’s future retirement plans. Early pension fund withdrawals can lead to an unnecessary tax burden and the risk of running out of money later in life, exacerbated by increased inflation. With the Bank of England forecasting a potential tip into recession, further stock market volatility and dampened growth prospects would impact investment returns.

Those approaching retirement face complex decisions about how to use their pension funds and calculate a ‘safe’ amount to withdraw to maintain funds through to later life.

Financial advisers can help investors with these complex decisions, explaining how pension funds might fare under different economic conditions. Yet, data from the financial regulator suggests few people are taking this option. Please do get in touch if you are thinking about the most suitable way to access your pension funds or for guidance on how your long-term pension planning might be affected.

The value of tax reliefs depends on your individual circumstances. Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Occupational pension schemes are regulated by The Pensions Regulator.

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