New pension freedoms set to come in
About half a million older savers will be handed radical new freedoms from next week as a "new pensions culture" dawns.
From April 6 onwards, people aged 55 and over will be making one of the most important decisions of their lives - what to do with retirement savings that they have spent decades building up.
Ros Altmann, the Government's business champion for older workers, said the move heralds the "start of a 21st century pension system, not a 20th century system where the pensions industry and the government knows best" about what people should do with their money.
When people come to retire, they will no longer be required to use their pension pot to buy a retirement annuity.
Instead, older savers will be able to access their pots how they wish, subject to their marginal rate of income tax. They could take their pot in one go, or use it like a bank account and withdraw cash in slices.
Experts said that for many people, the best option will be to resist making an immediate dash for their cash. They urged people to take time to carefully weigh up their options.
The new freedoms will apply to the 320,000 people who retire each year with a defined contribution (DC) pension.
Around 540,000 people will be able to take control of their savings from April 6, according to estimates from the Government. The reforms were unveiled in last year's Budget, so many people have been delaying their pension decisions until now.
Property investing, holidays, using the money to help family members and reinvesting the money with financial firms are some of the ways that people could use their cash.
But with so much choice available, fraudsters could see this as an opportunity to bombard savers with cold calls and texts to try to trick them out of their money. The Financial Conduct Authority (FCA) has said it is alert to the risks.
Concerns have also been raised by the pensions industry around firms' ability to cope with the fast pace of the changes.
The Government's free, impartial Pension Wise service will offer guidance to everyone eligible for the freedoms.
Pensions minister Steve Webb said: "This April is the start of a new pensions culture.
"It is right that people should have the power to make their own decisions about how they spend their own money after decades of careful saving - ending the effective obligation to buy an annuity will give people back control of their financial affairs.
"But when you are looking at your pension pot and your retirement income for decades to come, the best thing is to take your time and weigh up the very best options for you.
"The first step should be to speak to Pension Wise to understand all your options."
Dr Altmann said that for those who are considering what to do with their cash, the "do nothing option has an awful lot of merit".
She said that as well as people having the freedom to spend their money, they can also leave their pot untouched, allowing it to grow and perhaps be used for later life care.
While there is help and guidance in place, it is expected that some people will make bad decisions.
Mr Webb has said that people should be trusted with their own pension pots, but also has acknowledged that someone will "blow the lot and wish they hadn't".
Mr Webb has said he is "relaxed" about the possibility of people spending their savings on a Lamborghini sports car.
Dr Altmann said: "There are risks, but there were risks under the old system too. I really believe in the principle of trusting people with their own money and letting them decide what's best for them."
Laith Khalaf, a senior analyst at Hargreaves Lansdown, said: "Although the new freedoms open up on April 6 you don't have to do anything on that day. Don't rush blindly into any rash decisions. Remember that the money you keep in a pension rolls up."
He also reminded people to consider the tax implications of withdrawing large amounts of cash over a short time period.
Mr Khalaf said: "If you're a basic rate taxpayer who has built up a relatively large pension (and you cash it in), you could end up paying a higher rate of tax."
The Government's reforms to encourage retirement saving also mean that people will be able to pass their unused DC pension funds to a nominated beneficiary when they die. Many people have previously faced a 55% pension death tax.
Workers saving into a pension will also be given stronger protections from high charges for managing their pots, with the introduction of a 0.75% charge cap.
Consumer group Which? has a guide to help people prepare for their Pension Wise session at www.which.co.uk/pensionwise2.
Which? executive director Richard Lloyd said: "People will soon have much more freedom and choice over what to do with their hard-earned pension savings, but this is an extremely complex decision and one they can't afford to get wrong.
"Pension Wise will help people understand the various options but to get the most out of their appointment there are several things people should do in advance.
"They should consider how long they plan to keep working and their health, and ensure they have all the information about their existing pension pots and other forms of income in one place."