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Non-advised drawdown risks higher tax bills and running out of money

9 April 2018

Pension investors who have been using the pension freedoms to take an annual income may now have more in their pension pot than they started with, but risk running out of money in the long-term, according to Aegon.

According to Aegon’s estimates, someone with an average fund of £148,750 may have seen their fund grow by £8,750 even after taking £23,220 as income.  The figures are based on drawdown investors taking an average income of 5.2%.

However, Aegon warned that continuing to take this level of income throughout retirement could put pensioners’ savings at risk. While almost 700,000 retirees have opted for drawdown, over 200,000 haven’t taken advice. In failing to do so, they risk investment losses, larger than necessary tax bills or running out of money altogether.

Steven Cameron, pensions director at Aegon, said: “The pension freedoms have been extremely popular with nearly 700,000 people taking flexible payments. However, retirement can last 20 or even 30 years and prospects in drawdown change depending on how much income is taken as well as on investment returns which can change dramatically year on year.

“Overall, the last three years have been good for investments but they may not be as good in the coming years. As we welcome the third anniversary of the pension freedoms, we recommend anyone who is not already taking professional advice considers doing so.”

Aegon warned that taking too much too much too soon may also mean paying more income tax. The Inland Revenue recently talked of a ‘tax bonus’ from the pension freedoms of £5.1bn which is the amount of extra income tax those accessing the freedoms, taking higher income or starting earlier, are predicted to have paid by April 2019.

Cameron added: “Unless you have an adviser, there’s no-one checking your income.  Managing your retirement finances is hugely important, be it where to invest, avoiding paying unnecessary tax or reviewing how much income to take to avoid running out of money. In the same way a new car requires an MOT after three years, we’re suggesting that retirees book in for a financial health check three years after retirement, as a DIY approach could lead to a financial break down.”

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