Pension freedom is costing savers £2bn because their pots are wasting away in low-interest cash accounts
- Pension freedoms give savers aged over 55 free rein of their retirement savings
- Research shows more than 1.7million savers have taken their pension out in full
- One in three are feared to have moved their money to low-interest cash accounts
- It means they miss out on returns that a pension would bring on the stock market
Pension savers could be losing out on £2 billion by leaving their pots to waste away in cash accounts, analysis reveals.
The pension freedoms introduced in 2015 gave savers aged 55 and over free rein of their retirement savings.
Nearly two million savers have now taken their pension out in full, according to figures from regulator the Financial Conduct Authority (FCA).
One in three of savers are feared to have moved their pension to low- interest cash accounts – meaning they will miss out on valuable returns that it would bring on the stock market
But FCA research also shows that one in three of these people is feared to have moved their money to low-interest cash accounts — meaning they will miss out on valuable returns that a pension would bring on the stock market.
Interest rates on basic cash accounts vary, but savers can currently get a top rate of just 0.5 per cent on easy-access deals.
Yet money invested in stocks and bonds could expect to return 4.4 per cent a year —meaning those who move their pension to cash lose out on 3.9 per cent growth every year.
The FCA figures show that in the period between April 2015, when the freedoms were introduced, and March last year, just over 1.7 million people took their full pension pot out in cash.
Data shows the average cashed pot was worth about £12,500.
Pension consultancy Lane Clark & Peacock (LCP) says that if, as per the FCA research, one in three of these savers moved their money to cash accounts rather than kept it invested, it would mean 555,000 people could each lose out on £3,500 in growth on average before they turn 67 — a total of £2 billion.
LCP says the problem could be tackled by allowing savers to access their 25 per cent tax-free lump sum while leaving the rest invested as a pension.
Missing out: Savers can currently get a top rate of just 0.5 per cent on easy-access deals. Yet money invested in stocks and bonds could expect to return 4.4 per cent a year
Currently, the remaining 75 per cent has to be moved into a drawdown account.
The consultancy also says savers should be alerted to the threat to the value of their pension cash — with inflation now at 2.1 per cent, money in an account paying 0.5 per cent interest will decrease in real value by 1.6 per cent every year.
Laura Myers, a partner at LCP, says: ‘Savers who withdraw their entire pension pot and move most of it into a cash account are at risk of seriously damaging their wealth.
‘Interest rates on cash accounts are currently well below the rate of inflation, meaning money left in such accounts for the long-term will steadily erode in value.
The attraction of tax-free cash is well understood but it should be much easier for savers to leave the rest of their money behind inside the pension where it will continue to be invested for growth until they need it.’
Steve Webb, partner at LCP, adds: ‘Putting money in a cash account can seem safe, but the only thing that is guaranteed at the moment is that you will see your spending power decline year after year.
‘For those who have already used their freedom to take their pension pot in full, more needs to be done to alert them to the real losses they will suffer if they park their savings in a cash account.
‘Unless things change, hundreds of thousands more people could find they are not making the best use of their hard-earned savings.’
TOP SIPPS FOR DIY PENSION INVESTORS