It’s the hottest question on everyone’s lips, well, those that are soon to turn 55 – how should you manage the new pension freedoms?

Since April 6th 2015, people aged 55 and over can, if they want to, cash in all or part of their pension and do with it what they like. No one is being forced to buy an annuity any more.

This means that more than half a million people have instant access to what could possibly amount to hundreds of thousands of pounds (if not much more), sparking fears of spending sprees and rash investments.

Will people start fritting away their money on luxury holidays and classic cars? Will the control overpower them and leave them with no money or security for the future? Will many forget to check the tax implications of dipping freely into their pension pots?

Fortunately, latest research from financial firm PwC has shown that only 1% of people aged 50-75 intend to blow their entire pension pot on ‘treating themselves’. The majority of soon-to-be pensioners surveyed are actually taking their new-found freedom extremely seriously, with most committed to looking at all of their options for a secure income.

However, a new poll from Which? also reveals that many people still don’t understand that only 25% of your total pension pot can be withdrawn tax-free. Such widespread misunderstanding and lack of knowledge begs the question – are people ready for the accessibility and flexibility that the new rules offer?

Having the ability to take control of one’s own destiny is both an opportunity and a threat. Before, you were only responsible for saving as much as you could and then buying an annuity which would provide you with a secure income until you die. Now, the responsibility is potentially much bigger.

While you can still make the choice to buy an annuity, you also have the freedom of choice to invest it – or spend it – elsewhere. If you’re organised in managing your money, then this presents a great opportunity for you to shape your own future. If you’re a poor financial manager, then you could end up making hazardous decisions that threaten the health of your retirement income.

So, on the one hand, you could grow your pension pot dramatically by making the right investments, but on the other hand, you could leave yourself with little or no income in retirement.

It’s important to remember that the new freedoms do not mean that you have to cash in your pot. If having all of this responsibility and choice makes you feel uneasy, then you should find out the following before deciding to unlock your pension:

  • The exact value of your pension.
  • What is important to you - income in retirement, a lump sum now, inheritance for your children for example?
  • How much income you would receive if you left all your money in your pension until you retire compared to if you take all or part of your pot before?
  • If a reduced income will meet your requirements in the future?
  • What options are available to you if you withdraw all or part of your pension and the loss or gain of any associated benefits – i.e. tax charges and death benefits?
  • Whether any of these options provide a better vehicle for achieving your long-term goals?
  • If you intend to carry on working and contributing to your pension, will taking a lump sum benefit you?
  • If you have the resolve to manage your money carefully on your own.

If you come to the conclusion that releasing all or part of your pension is for you, then the next step is to do as much research as you can and take advice – more about this in my next blog.

View more articles by Steve Hogan