One in three savers plan to leave a bigger inheritance by boosting their pension pots thanks to new freedoms
- Using pensions to pass on wealth to younger generations is growing in popularity
- Workers risk underestimating their life expectancy and running out of retirement cash
- Rising numbers of people seeking retirement advice are showing interest in 'unsuitable' retirement products
Savers are striving to find ways of boosting their pension pots following a relaxation of tax penalties on leaving them to loved ones, new research shows.
One in three savers plan to leave a bigger inheritance as a result of the changes in April, which included the axing of a 55 per cent death tax on money in invest-and-drawdown schemes left to children.
People are taking advantage of the new rules by stashing more into their pension pots and trying hard to preserve what is already in there, according to research among over-50s by Investec Wealth & Investment.
Tax changes: Using pension pots as a means of passing on wealth to younger generations is growing in popularity following a relaxation of tax penalties
Steps taken include saving higher sums into a pension pot, transferring money into it from other savings and investment schemes, choosing to use up other sources of cash first, and moving to a smaller home to free up funds rather than tap into a pension.
Investec's study suggests that using pension pots as a means of passing on wealth to younger generations is growing in popularity following the recent tax overhaul, which accompanied pension freedom reforms giving people greater control over their retirement savings.
Beneficiaries of inheritances now either pay no tax if a pension holder dies before age 75, or their normal income tax rate - with the money they receive added to their earnings to calculate this - if they are 75 or over. The same rules apply to passing on annuities that come with death benefits - see the box below.
Nick Gartland, senior financial planning director at Investec Wealth & Investment, said its research underlined how the new pension freedom rules were already having a profound impact on the way affluent retirees fund their later years.
'Many of those who are fortunate to have built up a portfolio of savings and investments are turning to these ahead of their pension so the value of the latter can be preserved for the next generation.'
People who need to spend pensions under-estimate life span
While some people are wealthy enough to use their pensions as an inheritance vehicle, many are far less flush and need to spend their entire retirement pots before they die.
But people's tendency to under-estimate how long they will live puts them at risk of running out of money, according to separate research from Capita Employee Benefits.
For example, the majority of workers, some 27 per cent, predict their life expectancy is 76-80 years, whereas only about 7 per cent actually die during that period - some die younger. but the majority when they are older. Currently probability data indicates most people will die when they are aged 91-95.
Meanwhile, only 2.3 per cent think they will live to 100, but the current probability based on Capita's own actuary data is that 13.7 per cent will live that long.
This follows a recent study predicting life expectancy will overshoot current official projections for 2030, putting savers in an ever more difficult quandary over how best to fund retirement.
Number crunching: Some 27 per cent of workers predict their life expectancy is 76-80 years, whereas only about 7 per cent actually die that young (Source: Capita Employee Benefits)
Women's anticipated life span will increase to 87.6 years and men's to 85.7 years for people living in England and Wales in 15 years' time, according to research by Imperial College London.
That's up from a respective 83.3 years and 79.5 years for people alive in 2012. It's also longer by one year for women and 2.4 years for men than Office for National Statistics projections for 2030.
Capita says: 'The new pension freedoms mean that employees can now withdraw all of their pension in one go – without the lock of a guaranteed income for life, people risk underestimating their own life expectancy and using up their pension pot before they die.'
It also found:
* Just 7 per cent of over 55-year-olds had changed their retirement plans as a result of the new freedoms
* Half of workers said they found pension jargon complicated and confusing, and 45 per cent would save more into a pension if they had a better idea how they worked
* Some 52 per cent do not know how much they should be saving for retirement, and 47 per cent think everyone should have to join a private pension scheme regardless of how much they earn, with just 15 per cent disagreeing
* Two thirds or 67 per cent of workers in a pension scheme say their contributions are affordable and 21 per cent that they do not even notice contributions are being deducted.
* Just 11 per cent find contributions unaffordable
* Some 43 per cent of workers say they do not trust the pensions industry, and 16 per cent of those who have not joined their employer’s pension say it was because they do not like pensions.
Savers are asking for 'unsuitable' investments, say financial advisers
Rising numbers of people approaching financial advisers for help at retirement are showing interest in 'unsuitable' retirement products, an industry poll shows.
Nearly one fifth or 17 per cent of advisers reported an increase in clients asking about investments that were too risky, or didn't bring in enough income, according to the survey by Baring Asset Management carried out between May and June.
Some 43 per cent of financial advisers had seen an increase in clients who were worried or uncertain about the impact of the pension freedom reforms.
One in seven or 15 per cent had noticed an increase in retirees investing in income drawdown products, while 7 per cent had seen a rise in those putting money in target return or target income products.
Two out of five reported an increase in clients wanting to cash in some or all of their pension.
But only 1 per cent had seen a rise in purchases of traditional annuity products, which provide an income for life but have fallen out of favour due to their poor value.
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