UK MPs gather info on pensions freedom windfall spending

British lawmakers are gathering evidence of how pension savers are using their tax free pension freedom cash withdrawals of up to 25 per cent.

The information is to be discussed during parliament’s Work and Pensions Committee’s pension freedom inquiry on the success or failure of the relatively new scheme. The pension freedom legislation was introduced in April 2015, in spite of governmental fears the 25 per cent tax-free withdrawals would be wasted on luxury cars, long holidays overseas and other un-British excesses. The results of the inquiry are expected to be a mix of disastrous excess and frugal money management, with some benefiting and other wishing they hadn’t succumbed to wants rather than needs.

One retirement saver apparently blew his 25 per cent tax-free sum and blew it all on a new car, gambling and drinking, although his history of dealing with the financial side of everyday living had marked him as the ideal candidate for the scheme. After he’d had the time of his life, he returned to his old lifestyle of stability and monetary common sense.

Another told the committee he’d purchased a shepherd’s hut in order to rent it out to holidaymakers wanting to experience old-style life. His pension fund was worth a modest £46,000, an amount which could have given him an annual annuity-based lifetime income of £1,600. His shepherd’s hut now nets him rentals of £6,000 a year, making up his annual retirement income to just under £19,000. He’s now 60 years of age, and told the committee pensions freedoms were the only decent thing the then Chancellor had done for him.

An illustration of the possible benefits of pension freedoms was provided by a saver who’d taken a lump sum early in order to avoid having to breach the so-called ‘lifetime allowance’. He bought a boat and left the rest of his cash invested. If he’d just left his entire savings alone, the fund would have topped the one million pension savings limit and been taxed at 40 per cent.

The downside, according to a number of frustrated pension savers, was HMRC’s upfront tax grabs at excessively high rates on their withdrawals, plus the time it took to refund the cash. MPs heard suggestions that the British taxman should change its rules and speed up the process of refunding. For upcoming retirees who intend to use their 25 per cent withdrawals to help get them settled as expatriates overseas, it makes sense to get professional advice well in advance of leaving the UK, thus allowing enough time for HMRC’s wheels to grind slowly.