Urgent pensions warning as millions at risk of losing money in retirement – how to avoid it
SAVERS could lose out on tens of thousands of pounds in retirement income by taking tax-free cash from their pensions.
New pension rules introduced in 2015 meant savers could take a 25 per cent tax-free lump sum from their pensions to spend as they pleased.
Many of those are taking cash out of Defined Benefit (DB) pension schemes, which provide a guaranteed income for life.
Now experts warn that record numbers of people in these schemes are reaching retirement age and thousands are at risk of unknowingly losing cash.
Laura Purkess reveals the penalties that savers face for making lump-sum withdrawals.
ALMOST a third of eligible savers took a tax-free lump from their pensions last year, according to data from broker Interactive Investor.
The number of active pensioners in the Local Government Pension Scheme has risen by half a million in the past eight years from 1.46million in 2014 to 1.95million in 2022.
Meanwhile, the number of people retiring in the NHS pension scheme has risen from 38,200 in April 2019 to 46,000 in April 2023.
Savers with gold-plated Defined Benefit pensions don’t have a physical pot of money to take the cash from like those in other workplace schemes.
So they will usually be offered a reduced income for the rest of their life in exchange for taking a lump sum at 60.
Steve Webb, partner at pensions consultancy LCP, explained: “The ability to take tax-free cash is one of the big attractions of saving into a pension.
“But when you take a lump sum, you are often sacrificing regular pension income and, in the public sector in particular, you take a heavy hit on your lifetime pension.”
The NHS pension scheme, which has more than 3.4million members according to the latest figures, says members can choose to give up £1 of annual pension in exchange for £12 of tax-free cash.
The Teachers Pension Scheme, Civil Service Pension Scheme and LGPS are equally punitive.
Someone in one of these schemes with an annual pension of £10,000 could take a tax-free lump sum of £42,000 by reducing their annual income to £6,500 a year.
If they then lived for another 15 years, they would have given up £52,500 in income — almost £10,000 more than they received as a cash lump sum.
Life expectancy
Broker AJ Bell said that typically pensioners start to lose out around 14 years after taking the cash.
Women are likely to end up worse off as their average life expectancy is around 83 compared to 79 for men, according to the latest ONS estimates.
This means they tend to live for 23 years after taking their lump sum.
Deciding factors
WHETHER you decide to take a tax-free lump sum and get a reduced pension income depends on several factors, such as what you want to spend the cash on, according to Julia Peake, a technical manager at pensions firm Nucleus.
“If you do take a lump sum, you are locking in this reduced income for life,” she said.
“Consider whether you need a lump sum – do you have plans for the money, such as paying off a mortgage, or will it be sat in a bank account receiving little interest?”
She added that your life expectancy should be a factor in deciding whether to take the cash.
“Those in ill health may want to take the maximum out of their pensions to invest for future generations or enjoy while they are still alive, as they may not have the benefit of taking a full pension over many years,” she explained.
On the other hand, Defined Benefit pensions usually provide an inflation-linked pension for your spouse if you die, while taking the lump sum would put the cash at risk of being eroded by inflation or losing money in the stock market.
“There is a lot to consider, so working with a professional financial adviser can be of real benefit to help figure out what is best for you in your circumstances,” Ms Peake said.
You can find an adviser online using directories such as Unbiased.co.uk or the Government’s Retirement Adviser Directory, or by calling the Government’s Money Helper service on 0800 011 3797.
‘I took £8,000 out …and lost £10,000’
LINDA SOUTHALL had no idea she would be sacrificing thousands of pounds of retirement income when she decided to take the tax-free cash from her DB pension.
The 66-year-old, from Cardiff, took an £8,000 lump sum out of her Civil Service pension scheme when she was 60.
This scheme, like many other public sector pensions, gave her £12 of cash for every £1 of annual income she gave up.
So, she gave up £666 a year to take the £8,000 in cash.
But Linda has now realised that by taking this lump sum, she will likely lose out long-term.
Assuming she lives for 15 years from the date she took her pension, Linda will have lost almost £10,000 of pension income.
This would leave her £2,000 worse off overall.
“I had no idea I was giving up money by taking the cash lump sum,”
Linda said. “It was probably explained out somewhere in the paperwork, but there was so much of it.”
‘Free’ nursery fees
PARENTS are being hit with new fees by nurseries as extra free childcare kicks in, despite this being against Government rules, Sun Money has discovered.
The Government introduced 15 hours of free childcare earlier this month for two-year-olds and the Government will provide funding directly to childcare providers.
Previously, parents could only claim free childcare for three and four-year-olds.
But an investigation by Sun Money has found that when the new hours of free childcare were introduced, some nurseries around the UK brought in new compulsory fees, despite this being against Government guidance.
In one email to parents from a nursery in West Byfleet, Surrey, seen by Sun Money, the childcare provider said: “All children claiming funding of either 15 or 30 hours per week will be required to pay a daily fee for consumables. When claiming a funded-only place, parents are required to pay a non-refundable £50 registration fee.”
Government rules state that nurseries can charge for extras such as food, nappies and day trips, but they must not make these fees a condition of accessing a free place.
They also are not allowed to charge parents “top-up” fees to cover any shortfall in funding.
A Department for Education spokesperson said: “We have published statutory guidance for local authorities which makes clear they should ensure that providers do not charge parents top-up fees, and that additional charges for consumables or additional hours should not be made a condition of accessing a free place.”
A RECORD £9.8billion worth of interest was added to student loan balances between April 2023 and January 2024, more than the entire previous year, Sun Money can reveal.
Responding to a freedom of information request from Sun Money, the Student Loans Company disclosed a combined £9,839.6billion was added in interest in the tax year 2023/24 up to January 31.
It comes after the cap on interest rates for plan two, three and four student loans, which apply to graduates who started university after 2012, was increased to its highest-ever level of 7.5 per cent in December, up from 7.3 per cent for the previous three months.
Students can take out loans through SLC to cover their tuition fees and additional living costs.
Repayments are then deducted from their annual salary once they graduate and reach a certain income threshold.
For plan one students – those who went to university before 2012 – this is £24,990, while for plan two it is £27,295.
It is much higher for new graduates on plan four loans, starting at £31,395.
But the record-high interest rates mean millions of workers are seeing more interest added to their student loan balances each month than they are paying off.
The Government expects just a quarter of students starting university now will ever pay off their student loan debts.
SLC’s interest figures for the full tax year will be published in June.