Is investing your pension pot a bad idea?

Since the introduction of new pension freedoms, people aged over 55 have had more say in how they spend the money they have saved.

Traditionally, savers had two options; a ‘capped drawdown’ or to buy an annuity.

A capped drawdown would allow people to keep their money invested in the stock market and withdraw a restricted amount of money each year. Annuities, on the other hand, provide savers with an income for life.

As of April 2015, savers in a defined contribution scheme have been able to draw down as much (or as little) as they like from their pension pot. Savers are able to withdraw up to a quarter of their pension pot tax free but tax implications apply for the rest of the pot.

Savers have more options under the new reform however, some people may get caught out with a hefty tax bill if they do not understand the ins and outs of the changes.

Stephen Lowe, Just Retirement group external affairs and customer insight director commented: “It’s great that people are excited about pensions and seeing the possibilities the new rules create, but they have to open their eyes to the pitfalls too. There’s a tax trap waiting to catch the unwary – take care not to get snared.”

Watch this quick 3 minute video that explains pension options in more detail.

Seek professional advice

Bricks and mortar has been a popular option for people looking for a retirement income. On the surface, the concept is simple and many people like investing in a tangible asset.

Numbers from Hargreaves Lansdown show that 16% of people who plan to take money out of their pension pot will put their cash into buy-to-let property.

Research from Prudential shows that 37% of homeowners aged over 55 plan to purchase at least one more real estate purchase in their lifetime, with 18% of these planning to invest in buy-to-let.

Savers should seek financial advice before using their pension to invest in property. There are many options such as investing using a SIPP, securing a buy-to-let mortgage or investing using cash just to name a few. Each option will carry different tax implications which will depend on an individual’s circumstance. A financial advisor will be able to provide impartial advice for those considering this option.

But it’s not all doom and gloom…

Writing for Experience Invest , Money Marketing’s Head of News, Thomas Selby explained: “A property investment can also have significant benefits. It has the potential to provide a steady stream of rental income in retirement while the asset – the building itself – could appreciate in value. Furthermore, those with significant pots investing in cheaper areas could avoid stamp duty and potentially benefit from capital growth if the property market continues to boom.”

Click here to read the full pension reform guide.

It is too early to determine what effect changes to pension freedoms will have in the grand scheme of things. Investing using a pension can be very beneficial however, savers should seek professional advice from a tax advisor to ensure they understand the full extent of their financial obligations.