Just six months after the new pension rules came into force, we take a look at what people are doing with their newfound freedom.
Would you use your long-saved pension to pay for a divorce? Sadly for many people, the answer to that question is yes.
While it’s now pretty clear that the Lamborghini was a myth - less than 6% of DC members have accessed their pots since the beginning of ‘freedom and choice’ - taking the 25% tax-free cash lump sum has proved popular with retirees.
Of those who had accessed their money, 60% of DIY investors and 30% of DC members were accessing tax-free cash.
And retirees are using that cash to help pay for later-life divorce according to Fidelity Worldwide Investments.
From 1990-2002 [the number of people] aged 60+ filing divorce papers rose by 85%”
Maike Currie, associate director, said: “From 1990-2002 [the number of people] aged 60+ filing divorce papers rose by 85%…. In the past, unhappy marriages lasted until ‘death do us part’, now it’s more like they last until ‘retirement do us part’.”
While debt repayment still remains the most popular use of tax-free cash, the company found that divorce was one of three growing trends in how the money was being used.
Other, less-surprising, new uses of the money included helping the younger generation get on the property ladder, and buying boats and holiday homes.
Indeed, one case study from the company used the cash for multiple purposes: “We had one customer who used their 25% lump sum to pay off their ex-husband to buy the holiday home in France,” Currie said.
Meanwhile annuity sales are plummeting and fewer people are going into drawdown than expected.
The Treasury is more than happy to raid pensions tax relief to fill government coffers”
Part of the reason for this is that people can now take the tax-free lump sum without having to do anything with the rest of their savings, whereas in the past, taking cash would trigger a decision - usually the purchase of an annuity – for the remainder.
Another big driver of the tax-free cash grab is fear that the government might change the rules and people will be left unable to get their hands on the money.
In part, this may be a result of the recently closed government consultation, which makes it clear that the Treasury is more than happy to raid pensions tax relief to fill government coffers.
The pensions industry as whole has been waiting to get some indication of what the vast majority of people will do at retirement, in order to make sure that DC default investment strategies are appropriate for member decisions.
Clearly, for now at least, (tax-free) cash is king. What retirees will do with the rest remains to be seen.