More pension savers keep some of their retirement pot in cash

More savers are choosing to keep some of their retirement fund in cash, research suggests, as uncertainty over the future of pensions weighs on people’s minds.   

According to the JP Morgan-owned bank, Chase, some 39 per cent of its customers say they are now including cash savings as part of their retirement planning.

While cash is easier to access and can form part of a successful retirement plan, investing via a pension is generally considered the best way to build a retirement fund over the long term.  

Traditionally the bulk of the typical Britons’ retirement income comes from the state pension and their work pension, with more than 80 per cent of adults enrolled in their employer’s scheme. 

While this is still the case, Chase’s research suggests that over the last year, savers have diverted money to a savings account that they otherwise might have put in their pension or invested. 

Almost half of adults, some 48 per cent, said they currently preferred to save in cash instead of putting their money in their pensions or investments – though many will have been doing both. 

Though Chase’s survey asked respondents about their behaviour over the last year, it comes as speculation mounts over the potential changes that could be made to pensions in the Autumn Budget.

Shaun Port, managing director for savings at Chase, said: ‘The simplicity and perceived safety of cash savings products, combined with higher interest rates seen in recent years, means they are proving more attractive for many UK adults.

‘While cash savings may not always deliver the same potential long-term growth as investments, savers are clearly concerned by past changes to pension rules and what might be announced in the forthcoming Autumn Budget and are now using cash savings accounts for longer-term savings goals.’

Chase has seen a 25 per cent surge in cash savings account openings compared to a year ago, it says, as savers opt for security and accessibility for their money.

However, doing so could mean they lose out on the long-term benefits of investing via their pension or other investment products.

The Chase data was weighted to be representative of all age groups.  

What are savers’ fears about the Budget? 

One of the main fears among savers is that the pension tax-free lump sum could be under threat. 

Taking up to 25 per cent from your pension free of tax is a popular perk for those aged 55 and over. However, there are fears this could be slashed to a lower percentage, or that the cap of £268,275 could be cut. 

However, Pensions Minister Torsten Bell, who previously called for the tax-free lump sum to be limited to £40,000 when he ran think tank the Resolution Foundation, said earlier this month that reports that a cut to the lump sum could be on the cards were ‘a lot of nonsense’.

Charlotte Ransom, chief executive of Netwealth, said: ‘Reducing the pension tax-free lump sum could severely disrupt people’s future retirements. 

‘Many savers will have incorporated the option of a 25 per cent tax-free lump sum into their financial plans and if it were cut or abolished these plans could easily be derailed.’

Savers are advised against making any rash moves based on this speculation, though, unless they were already planning to make a lump sum withdrawal. 

It is not the first time Labour policy has disrupted people’s pension planning.  

In last year’s Autumn Budget, it was announced that pensions would be brought into the inheritance tax net from 2027, a move that will see thousands more families paying inheritance tax.

This has also prompted some to take money out of their pensions, though again they should seek advice before doing so. 

Money pulled out of a pension can be detrimental because it means the money no longer has the chance to grow over time through investment returns. The risk is greater if the money is taken a long time before retirement, as the lump sum is also eroded by inflation. 

‘Pulling pension cash has serious consequences’

Simon Harrington, head of public affairs at the Personal Investment Management & Financial Advice Association, says: ‘This shows a clear trend, that people are pulling money out earlier, and in greater sums, than they otherwise might – behaviour that could have serious long-term consequences.

‘Taking the 25 per cent reduces the invested balance, depriving the consumer of much needed investment growth in the ten years or more up to their state pension age. This could be equivalent of up to five years of the average state pension income.’

Harrington also warns that any changes that do come in, are unlikely to take immediate effect, meaning that savers could be losing out by taking panicked action.

He said: ‘Persistent uncertainty around pension reforms undermines confidence and prompts behaviour that risks impacting people’s financial futures. What’s more, even if reforms were decided upon, changes would likely not take effect immediately, giving savers time to adjust. But speculation alone is already driving short-term decisions that could leave people worse off in retirement.

‘This uncertainty, coupled with actual policy interventions such as the plan to levy IHT on pension funds runs the risk of further discouraging people from in investing in pensions.’

Lump sum withdrawals are irreversible, meaning that those who withdraw could face losing the tax-free growth benefits of their pension if they withdraw it purely out of fear, rather than because they need it.