From April 2015 those aged over 55 will have freedom to withdraw all of their pension in cash, although any amount above 25 per cent of their pension will be taxed at their normal income tax rates.
A recent poll of over 1600 Trustnet readers showed almost half were considering drawing down from their pension pots at 55 following the new rules.
However, Kerry Nelson (pictured), managing director of Nexus financial advisors says investors should limit the temptation to cash in on the pension pots so as not to risk depleting capital capable of generating an income. She also says it is very tax inefficient as it will immediately increase tax liabilities.
The only circumstance in which she recommends draw down is if people are in desperate need of the income or have significantly diversified assets.
Jason Witcombe, director of Evolve Financial Planning said he is concerned the new rules will mean allot more people managing their money, resulting in losses for those who overlook the risks.
“People tend to overlook the risks. It’s easy to focus on a positive outcome, rather than considering what the negatives are.
“I would encourage people not to automatically write off annuities, they guarantee to give you an income for the rest of their life.” “For people who might want to leave money for children after they have died they might not be so good, but for a single person that might well be just the thing they are after.”
The main dangers is that investors run down their savings and get tax bills that people are not expecting, according to David Smith, wealth management director for Bestinvest.
“Greater drawdown may encourage investors to change their strategy from a fixed income bias to one with a greater equity bias on the grounds that you no longer have hedge against annuity rate movements.”
“You could bet your bottom dollar that when fixed income went up or down annuity rates would be moving the other way and now you don’t have to worry about annuity rates.”
“At least with the drawdown limits there was a good methodology behind how much you could draw down each year."
“Now, with everybody left to their own devices how are they going to know how much they can withdraw each year without running money too quickly, without advice?”
“We’re advising nine out of ten clients against it except for those paying 20 per cent basic rate income tax.”
“We’re already seeing demands from clients for capital increase.”
“But we’re telling that if they are reliant on their pension for the rest of their and they exhaust or whatever they invest in does not work out they will be in dire straits and they won’t get a second chance."
However, Smith thinks that many investors will be hesitant and more risk averse when they are presented with the option.
“We’re hoping that will be the case, at least,” he said.
Also in the Budget, the chancellor said that the Government would introduce a guarantee, enforced by law, that would ensure free and impartial, face-to-face advice for everyone retiring with a defined contribution scheme in the private sector.
Maxine McIntyre, head of proposition at Close Brothers Asset Management says free guidance is no substitute for independent financial advice.
“The Chancellor’s dramatic pension reforms have thrown the issue of retirement income back into the spotlight.”
“Following initial praise, scepticism has emerged that this may be a way for the government maximise tax receipts immediately rather than during the course of a retirement.”
“Regardless of the motive behind the powerful policy change, the ability to take all pension pots as cash Britain could wind up poorer in the long term.
“While providing fantastic freedom, there is great risk for those who have no other supplementary source of income to support their retirement.”
“To avoid Britain being left with penniless pensioners it’s important that everyone works hard to have firm financial plans in place for their future.”
“With recent ONS data revealing soaring life expectancy rates there is an even greater need to plan for a longer retirement.”
“We’d like to see further evidence of the government’s plans to support the millions of over 65s who could be left without regular income to fund their retirements.”