Marvin OnumonuNearly a third of people over 55 are confused about their pension withdrawal options, according to new research from Standard Life, part of Phoenix Group.
The research found that 29% feel unsure about the choices available, and only a third, or 32%, feel confident in understanding their options.
Additionally, 33% of those aged 55 and over lack confidence in their knowledge of how pension withdrawals are taxed, with only 29% feeling sure about this aspect.
This data emerges as the Government and the Financial Conduct Authority (FCA) wrap up a consultation on improving support for those without access to financial advisers.
The proposed ‘targeted support’ approach would allow pension providers to offer clearer guidance based on the typical decisions made by people in similar situations.
Mike Ambery, retirement savings director at Standard Life, said: “It’s concerning that nearly ten years after people with a Defined Contribution (DC) pension were given more choice in how to access their money as part of ‘pension freedoms’, so many people feel confused about their options.
“Providers have a big role to play in making communications as clear and targeted as possible, and greater access to personalised guidance is key.
“We want to be able to help people make good decisions and if implemented properly the targeted support solution could help us steer people towards the right outcomes for them.”
Ambery highlighted the importance of understanding potential tax implications when accessing pensions.
He noted that over 221 individuals fully withdrew pension pots of £250,000 or more between October 2022 and March 2023, resulting in tax bills totalling at least £97,500.
Catherine Sermon, head of public engagement and campaigns at Phoenix Insights, said: “At retirement age many people are faced with complex decisions on how to use their pension savings despite often having very little knowledge or support.
“Without paying for professional financial advice, the twin issue of high-stakes decision-making and a lack of understanding leaves people at risk of choosing a retirement strategy that might not be in their best interest.”
Sermon added: “Enabling firms to offer more tailored support so customers are better informed at this key juncture could be a significant factor to closing the gap between professional advice and free generic guidance services.”
Ambery explained how individuals can access their pension pots and the associated tax implications.
“You have several options for how to access the money in your pension pot: Take some or all of your pension pot as a cash lump sum – beware of that tax charges might apply to significantly reduce the money you receive; Buy an annuity – an annual income that will be paid to you for the rest of your life; take money directly from the pension fund, and leave the rest invested; or a mix of these options.”
Ambery added: “You can take your whole pension pot as cash straight away if you want to, no matter what size it is.
“If you do this, 25% of your total pension pot will be tax-free. You’ll pay tax on the rest as if it were income.
“You can also take smaller sums as cash whenever you need to, and 25% of each sum will be tax-free.”
He said: “Your state pension is taxable, but tax won’t be taken from your state pension itself and will normally be taken from any other sources of income that, together with the state pension, take you above the personal allowance.
“The full new state pension is just over £11,500 in the current tax year, which is less than the standard personal allowance of £12,570.”
