Proposed changes to the way in which UK pensions are managed could lead to a bonanza of world travel for the over 55’s. Prime Minister David Cameroon recently announced plans to allow over 55’s to gain access to the money in their pension funds rather than it being locked up until retirement.
The government claims that many people have worked for decades, diligently saving money towards their retirement. They claim that UK savers deserve access to these funds at any time and that a new policy will allow them to do just that. The money does, after all, belong to the individual savers so it is understandable that the coalition government claim they should be able to do whatever they want with the funds.
The new policy comes into effect in April 2015 and allows anyone aged over 55 to withdraw any or all of the money from their pension fund if they so desire. Unsurprisingly the potential uptake is huge and could lead to a welcome cash-injection into the UK economy as thousands of British savers suddenly gain access to potentially millions of pounds.
A recent survey suggests that as many as 200,000 people plan to withdraw the entire sum as soon as they are allowed. Overall 12% of over 55’s are expected to withdraw at least some money from their savings fund though of course we will have to wait and see what the true figure is.
The same research also looked into what the savers in question plan to do with their newly liquidated wealth. It seems that booking a holiday is currently top of the ‘to do’ list for most eligible individuals, with 21% of the respondents planning to head off abroad thanks to the ‘windfall’ of cash.
That means that spring next year could see a sudden increase in holiday bookings within the UK, as well as putting strain on essential holiday services like travel insurance and passport renewals. Travellers are recommended to make plans in advance of this date as a result so as to avoid unnecessary delays. There are also risks that as package holidays and flights typically run on a ‘supply and demand’ model, this spike in interest could result in rising prices in spring 2015.
Of course while this new financial freedom will make many diligent savers very happy indeed, not everyone is impressed with the news. For example some economists are concerned about the long-term implications of emptying pension pots; especially when more people are looking to buy a holiday than the reinvest the funds into a suitable growth vehicle.
Quite where this will leave people in old age as their pension funds dwindle and state pensions continue to drop remains to be seen.
In addition, there are uncertainties about the tax implications of withdrawing money from your pension fund. A recent study suggests that only one in five actually understand what tax they’ll pay for their withdrawals. The fact is that the first 25% of your pension fund may be withdrawn tax-free. After this however the funds are charged at standard UK rates, meaning that depending on the sum being withdrawn this could amount to 40% tax.
A cynic might therefore suggest that the key motivator for the government in making these changes has less to do with goodwill and everything to do with the potential windfall of tax revenue the government can expect to see.