Pension Reforms Could Mean a Big Cash Injection
The current pension crisis has been well publicised, but reforms that have come into effect over the past two years could spell better pension freedom.
Most of the news we read in the papers and online about pensions in the UK concerns one major company after another reporting record pension deficits and closing down their pension schemes. For some, like BHS, it has even led to the permanent demise of some high street names.
Yet look beyond the tabloid headlines, and there is some good pension news around too, particularly for those who have been ploughing years of investment into private or contributory company schemes.
Pension reforms that were initially announced in the 2015 budget gave better freedom than ever before for you to cash in your pension and take better control of your finances to make your money work harder.
Multi pension families
It is no secret that pension funds have been underperforming over recent years, leading to the high profile problems mentioned earlier. The sensible course of action is often to use the freedoms offered by the pension reforms to withdraw money from these poorly performing funds and reinvest it in other ways that will produce better returns.
However, some people are understandably cautious about taking this course of action, and want the comfort of knowing that their pension fund will provide a regular income stream on retirement.
If you have multiple pensions, this provides a perfect opportunity for you to get the best of both worlds. A growing number of financially astute over 50s decide to cash in part of their pension pot, or the smaller of two or more separate funds, thereby hedging their bets and spreading the risk.
What to do with the money
When you have released the money, it is yours to do with as you wish, but there are three common purposes to which it is usually put:
1) Reinvest – there is a wide range of alternative investments that you can explore, all of which will generate a better return than leaving the money sitting in a pension pot. The buy to let market is enormously popular with retirees, as it provides both a steady monthly yield and a great return on your capital investment. If you are reluctant to tie your money up in this way, or do not fancy the commitment of more property, how about investing in gold or bitcoins as an investment type that is relatively recession proof?
2) Pay off debts – more of us retire in debt than ever before. Mostly this is mortgage debt, but we also have credit cards, personal loans and car finance. Making monthly payments against loans with high interest rates, while you have money sitting in a pension fund accumulating interest at a lower rate, is a losing formula that simply makes no sense.
3) Spend – it is not a dirty word. You have been ploughing this money into your pension fund for years, so if your main pension fund will return enough to live on, then why not cash in the smaller pot and spend it on those treats that you have always promised yourself, such as a world cruise or a new car? After all, that is what retirement is supposed to be all about.