Are you a “DIY dipper”? Why drawing your pension without advice could cost you

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You’ve previously read about what the Apollo space missions can tell you about your retirement.

In simple terms, getting into space – the accumulation of your pensions and savings during your working life – is the relatively easy bit. Returning from space – drawing your income from your finite resources for the rest of your life – is much harder.

Consequently, taking advice at the point of most risk would seem prudent.

Despite this, new research has revealed that fewer than half of all people accessing their pension for the first time in 2021/22 did so after taking professional advice. Most people access their savings without speaking to an expert first.

If you’re considering joining the ranks of so-called “DIY dippers”, there could be perils you need to navigate. Read on to find out more about these worrying figures, and for three reasons accessing your pension without advice could leave you vulnerable.

Only 1 in 3 pensions in 2021/22 were accessed after taking professional advice

Research published by Actuarial Post has uncovered the concerning statistic that, in 2021/22, only 1 in 3 pensions were accessed after professional advice. A further 1 in 8 took guidance from the government Pensions Wise service.

Overall, 53% of the 705,666 defined contribution (DC) pension pots accessed for the first time were taken by “DIY dippers” – people making decisions without independent advice or guidance.

More than a third of those entering drawdown did so without support while, more worryingly, no advice or guidance was used for around two-thirds (65%) of the 395,237 pensions fully withdrawn.

Stephen Lowe from the firm who undertook the research says: “Many hundreds of thousands of pensions are being accessed or emptied without professional support, increasing the risks that pension savers may achieve poor outcomes, pay unnecessary tax or fall victim to scams.”

Accessing your pension pots without first seeking advice could leave you vulnerable. Here are three reasons why.

3 reasons accessing a pension without advice could cost you

  1. You could pay more tax than you needed to

You can normally access up to 25% of your pension pot as a tax-free lump sum (or a series of smaller lump sums). Anything above this will normally be added to the rest of your income in a given tax year and you’ll pay tax at your marginal rate.

So, if you take a large lump sum from your pension, you could easily push yourself into a higher tax bracket. This might mean you lose 40% or 45% of your pot to Income Tax.

Losing a large chunk of your pension fund to tax could mean that you no longer have enough money to fund your desired lifestyle in retirement. We can help you to draw the income you need in retirement in a tax-efficient way.

  1. You could fall victim to a scam

While pensions cold-calling is now against the law, many resourceful fraudsters are still out there.

The time at which you access your pension is a key opportunity for unscrupulous actors. For example, “pension liberation fraud” is where someone tries to deceive you by convincing you to access money in your pension pot before retirement.

If an individual or organisation contacts you about accessing your pension – especially if they promise “early access” to your fund – then treat this with caution. Even if they have a genuine looking website or prospectus, it can often be a fraud and it could lead you to lose your retirement savings.

Accessing your pension without advice could leave you susceptible to a clever scam. So, always discuss any opportunity you have been offered with a financial planner before making any decision.

  1. You could deplete your pension too quickly

As life expectancies rise, your pension pots might need to last you 20, 30 or even 40 years. So, it’s vital that you ensure you draw a sustainable income that will last you for a lifetime.

If you draw your pension too quickly, you could find that you run out of money later on, meaning you may not be able to live the lifestyle you want.

Accessing your pension without advice could mean you take too much from your fund. When you work with a financial planner, they can use sophisticated cashflow modelling to establish exactly how much income you can draw sustainably so you don’t run the risk of running out of cash.

Get in touch

If you’re approaching retirement and you’d like to discuss the most appropriate, sustainable, and tax-efficient ways to draw an income, we can help.

To find out more, please get in touch. Email or call us on 01454 416653.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

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