I had a long chat with reader Paul Renshaw this week. Like a lot of people his age, the 59-year-old is looking forward to the new pension freedoms that come into force next month. He's attracted, of course, by the new opportunity to be able to take the cash out of his pension pot and do whatever he wants with it.
It is a pleasing prospect. You could use the cash to go on a dream holiday, or buy a flash new motor, for instance. Paul (pictured) plans to put the £30,000 he has sitting in two pensions into improvements for his home and garden in Havant, Hampshire. "I worked out that the pensions would give me an income of around £75 a month, which won't go very far. The £30,000, on the other hand, would be really useful now to finish my home off. I've got several little jobs to do and a garden to sort out."
Paul is 60 in June and plans to keep working as an engineering project manager, but he feels that the landmark age is a good time to cash in two of his pensions. "When I heard about the new rules, one of my initial impressions was that if you've got pensions of £30,000, you can take all the cash without a penalty."
But things aren't as simple as that, as he discovered. "I asked questions at my bank and Citizens Advice, who raised the tax risk – which I didn't really understand. I'm not a financial whiz-kid but I'm not silly with money, so I'm now talking to a financial adviser to work out the best option."
Paul's not alone in finding it hard to make sense of his pension choices. New research from Citizens Advice, due to be published on Monday, reveals that many people face similar difficulties, not just because of the confusing new opportunities. There are challenges managing money day to day, as well as planning future finances with certainty and supporting a family.
Gillian Guy, chief executive of Citizens Advice, says: "People want to be in control of their finances and secure financial resilience and independence in older age. But with economic uncertainty, social change and major reform, many are finding this difficult. It is vital that they get support to help them understand their pension options, so they can make informed choices."
It is vital. The new pension freedoms that come into effect from 6 April may give you the chance to take the cash out of your retirement savings and do what you like with it. But anyone who does could end up making a costly mistake. There are two main reasons why. First, there could be a huge tax demand on the cash – as much as 40 per cent.
The second reason is a reminder: a pension is a planned savings scheme with a clear intention – to ensure you have enough cash to last through your older years. If you don't use the cash to buy yourself an income for life, then you could end up being reduced to living off the relatively meagre state pension.
That's why anyone looking forward to pension freedom should consider their future financial situation, rather than just the opportunity to get their hands on some cash right now.
Experts on the challenges posed by pension freedom
I've been interviewing experts for a range of new online videos. In one, Jamie Jenkins of Standard Life told me: "The biggest risk in the new pension freedoms is scammers." John Lawson of Aviva warned that living longer "will bring financial problems". Meanwhile Darius McDermott of Chelsea Financial Services shared some Isa tips. You'll find all the videos, with more added next week, at independent.co.uk/money.
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