Two fifths (39%) of SIPP holders put their pensions tax free cash into a savings account, when accessing drawdown, new research from interactive investor has revealed.
Another 19% put the money in a cash ISA and 11% who opted for premium bonds.
Interactive investor said that a quarter (25%) of those used some or all of the money to repay their debts and/ or mortgage, while 12% said the cash helped fund day-to-day living. The same percentage (12%) said they used the money to offer financial assistance to their children.
Myron Jobson, senior personal finance analyst at Interactive Investor, said: “It is interesting that a large percentage of those who have accessed their pension pot said they have redirected the funds into some type of savings account. Having a large sum of money readily available can provide a sense of security and reduce financial anxiety in retirement. However, it is important to bear in mind that interest earned on savings above the annual tax-free savings allowance and outside an ISA and SIPP is taxable.
“For those with an ample rainy-day fund and who can afford to put money away for at least five years should consider leaving their money invested for the potential of long-term inflation-beating returns that can far outstrip savings rates.”
Interactive investor said that between 6 April 2023 and 2 August 2024, 53% of customers aged 55 who chose to move all or part of their SIPP into drawdown withdrew the full 25% tax-free lump sum. The percentage fell to 44% across the broader cohort who entered drawdown.
Meanwhile, over a third (34%) withdrew less than 10% of their pension pot tax-free, while 22% took out a sum between 10-24%.
Interactive Investor said these figures are slightly higher for customers who were age 55, with 53% plumping for the full 25%, while a quarter took between 10-24% and 22% took less than 10%.
Jobson added: “The 25% tax-free pension lump sum rule is popular among our customer base, particularly among those who reach retirement age, the majority of whom took the full amount in one fell swoop once they reached retirement age of 55 since the start of the 2023/24 tax year.
“It is worth bearing in mind that this cohort of retirees is likely to have defined benefit schemes that offer a guaranteed income for life, an arrangement that has largely gone the way of the dodo because they have become too expensive for employers to run. The ability to withdraw a quarter of a pension pot tax free is hugely beneficial to savers immediate financial obligations, such as paying off a mortgage, clearing debts, or to help their children onto the property ladder.”
Jobson said for pension savers seeking to take a tax-free lump sum, they should have plans for the money.
“Withdrawing cash you don’t need can come with several potential pitfalls. These include paying more income tax and capital gains tax than necessary, increasing your inheritance tax bill, and harming how quickly your money grows in the future,” he added.
