What are you planning to do with your pension pot? More than half a million people in the UK intend to use their hard won retirement savings to pay off their mortgage according to specialist insurer Partnership. Using either the tax-free 25% lump sum or – more worryingly – the entire pension pot, 631,000 pension savers are accruing to pay down debt.
Currently around 40% of household income in retirement is funded by workplace pension schemes, with the remainder made up of the State Pension and other benefits. Partnership's data reveals pension savers are banking on the State Pension providing some, or even all, of their income in retirement – hence why they feel comfortable allocating workplace savings to pay off mortgage debt. But the State Pension may not be around forever.
Labour Party leadership candidate Jeremy Corbyn this week expressed interest in a flexible retirement age, as well as the creation of an ‘Older People’s Commission’ to review funding options.
Tom McPhail, Head of Pensions Research at Hargreaves Lansdown said that tinkering with the State Pension could jeopardise its existence.
“State pension provision has always been based on a longevity lottery, with those who die young losing out compared to the longer lived,” he explained. “Any deviation from this, giving some people a right to draw their pension at an earlier age could be hugely expensive.”
Much like the NHS, the State Pension is a benefit that the people of the UK take for granted – and politicians are loath to admit may not be infinitely sustainable. But many economists agree that it a case of when not if the State Pension will be scrapped. One thing is for sure – if you plan on using your workplace pension pot to pay off your mortgage, you would be best placed to have a large SIPP to fund the rest of your expenses in retirement.
Pension Pay-outs Reach £2.5 billion
The latest figures from the Association of British Insurers reveal that pension savers have been withdrawing an incredible £27 million a day since the freedoms were introduced in April. Almost £2.5billion worth of payments were made to customers in the first three months – as well as a further £2.3 billion being used to buy 37,500 regular income products such as annuities or income drawdown products.
Of those making withdrawals, £1.3 billion has been made up of cash lump sums, with an average payment size of £15,000.
Adrian Lowcock, Head of Investing at AXA Wealth says that the figures so far are encouraging.
“So far the evidence shows that people are behaving responsibly with the new pension freedoms and fears of reckless spending were unfounded,” he said. “It’s good to see that, on the whole, it is those retirees with small pots that are taking advantage of the pension freedoms to access their pension money.”
