Tax-free pension cash is a powerful psychological anchor for many over-55s as they approach retirement, with two-fifths (42%) saying they either plan to take the full lump sum in one go or have already done so, says the Standard Life Centre for the Future of Retirement.
The research amongst 55-70 year-olds with defined contribution pensions shows that among those planning to take the 25% tax-free lump sum in one go, nearly half (44%) say it will mark the start of their retirement journey.
A third (32%) say it will give them a sense of financial security and 21% say they view it as a separate pot of money entirely.
The research accompanies a new Standard Life Centre for the Future of Retirement report, which found that the tax-free lump sum is often seen as a tangible reward after a lifetime of saving. Many people also mentally separate the lump sum from the rest of their pension, treating it as a bonus earmarked for big financial decisions.
The findings revealed that people often prioritise simplifying their finances before retirement, using the lump sum to reduce debt or pay off a mortgage in order to create a ‘clean slate’.
Nine in 10 (90%) of 55-70 year-olds say they want their finances to be as simple as possible before retirement, while 68% feel confident about deciding how and when to take their tax-free cash.
While the intended use of tax-free cash varies, many approach it with a clear purpose in mind. One in three (28%) expect to use it for an expensive treat such as a car or holiday, while the same proportion plan to use it as initial income for day-to-day expenses before they access the rest of their pension. A fifth (22%) plan to reinvest it elsewhere and 17% want to reduce their working hours and top up their income with it.
Catherine Foot, director of the Standard Life Centre for the Future of Retirement, said: “The tax-free lump sum is frequently viewed as a reward after many years of saving. The psychology at play is interesting and people typically think of this money as a distinct pot, not necessarily treating it as retirement income. While retirement income decision-making is regularly associated with feelings of uncertainty, when it comes to tax-free cash many people have a clear plan in mind for the money.
“The decision to take a lump sum in full may be right for many, with many using it to secure a regular income, but it also carries the risk of depleting a pension pot too early if not carefully managed. Its influence also exposes the importance of timely, accessible guidance that supports people’s long-term financial security, alongside their short-term needs.
“The findings highlight the need for clearer, well-timed and more accessible support to help people understand how and when to use tax-free cash, the trade-offs involved in taking it in full or in stages, and how to balance short-term peace of mind with long-term regular income security.”
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