Fears for pension savers as tax-free cash is gobbled up by debt

Standard Life also found that, 16 per cent, bought or will buy a new car, 13 per cent have used or will use it for a short-term holiday and seven per cent for a long-term holiday or travelling with their 25 per cent tax-free pension lump sum.

One in seven, 14 per cent, used or will use it to improve their current lifestyle, while almost one in ten have or will use it to help cope with the rising cost of living. Workers were those more likely to use tax-free pension cash to settle debt, while those who are working either full or part time are more likely to use or have used their tax-free pension cash to pay their mortgage or other debts, compared to those who are not working.

Dean Butler, managing director for retail at Standard Life said tax-free cash was one of the great benefits of a pension allowing savers to take a quarter of their pot without paying tax on a single penny of it, all the way up to a maximum of £268,275.

He said: “Everyone deserves to enjoy their tax-free cash, however pension savings need to stretch for the whole of your retirement, and so taking too much too early or at once could cause difficulties later. You don’t have to take all your tax-free cash at once if you don’t want to. Your tax-free pension lump sum is a real bonus, and it’s good to set some time aside before spending to work out how to get the most out of it.”

Rising interest rates worrying pension savers

Almost half of people over the age of 55 who are paying off mortgages are worried about rising rates, continuing to meet repayments and how to pay their loans off in full.

Research carried out by Pension Bee in June found that three quarters of respondents over age 55 who have mortgages are worried about rising interest rates and concerned about how they will manage their payments to the end of term.

Those over over 55 with a household income of less than £30,000 were more worried about rate rises than average and also about managing repayments to the end of the term.

Interest-only mortgage 

Less than half of over 55s who took part in the PensionBee survey were on capital repayment mortgages, while 40 per cent said they are on ‘part capital repayment, part interest only’ and almost one in five of over 55 respondents with mortgages are on interest-only deals.

PensionBee pointed out that this meant that when they get to the end of their mortgage term, they will have to have enough cash available to pay off the remaining capital balance. 

Almost half of mortgage holders aged 55 or over admitted they are unsure how they will pay off their mortgage in full. The most common remaining mortgage balance was less than £50,000, however, a small proportion, six per cent, of reported their balance exceeding £250,000. 

Becky O’Connor, director of public affairs at PensionBee, said“The current mortgage rate rise shock may be contributing to an abrupt rethink of retirement plans and causing worry and uncertainty among the population of older homeowners still repaying loans."

Using up tax-free pension cash

“Anyone hoping to wind down from work as they approach their pensionable years and who still has a mortgage to pay could face a significant reality check in the coming months. Their mortgage could suck away even more of their disposable income, potentially forcing them to work for longer. 

“People can access their pension from age 55 and can take 25 per cent as a tax-free lump sum. With mortgage rates rising so rapidly, it may be tempting to tap the pension to pay off a home loan. 

“Having a mortgage that runs into retirement can be a problem, because repayments can mean people have to take more out of their pensions in the early years.

“Anyone who is considering this must bear in mind the potential impact of using up tax-free cash early on in retirement and then running the risk of not having enough money later on to maintain enough income for a decent living standard."