How pension changes could let you drive a supercar
Northern Ireland retirees face a choice of dipping into their pension pots to pay off debts or going on a spending spree as the end of compulsory annuities brings the biggest pension overhaul in a generation.
From Monday, tens of thousands of Northern Ireland savers will have more choice in what they do with their defined contribution pension, with anyone aged over 55 now able withdraw their pension pot as a lump sum.
Previously, when cashing in their pension, workers were forced to purchase an annuity, a product which offers a guaranteed income for the rest of your life - but that option has in recent years offered very poor returns.
One in four of the working population over 55 in Northern Ireland - estimated at tens of thousands of people - will now be eligible to take advantage of the new rules, Graeme Neill, director of the CRN Financial Group said.
Keith Storey, director at ASM financial planning in Belfast, said they have received a number of inquiries from clients about withdrawing money from pension pots - not for making a one-off flashy purchases but to clear debts.
He said: "What has concerned me is the number of request for withdrawals of £25,000-£75,000 to pay off debts. These seem to be short-term debts, for example credit cards which have high rates of interest, and the individuals are struggling to pay down the outstanding balances. The requests are not to buy cars, pay for holidays or family expenses but are to pay down debts."
It's estimated that the average unsecured debt is higher in Northern Ireland - £18,360 - than the UK average of £15,267 - which could pile on the pressure for pensioners here to be sensible with their money.
Geoff Clarke, director at Belfast pension consultant Xafinity, said the best option for people will depend on the size of their pot.
"For people with smaller pension pots of up to £30,000 there may be an argument that their standard of living or quality of life would be better enhanced were they to take their fund as a lump sum rather than receive £90 a month for the rest of their lives.
"Those on larger funds of £150,000 and above, may well elect to access their pot on a flexible basis or mix and match sources of income as their needs dictate, but they will probably do so as a result of continued professional advice from those that helped them accumulate their fund in the first place.
"For those with pension funds between £30,000 and £150,000, the most appropriate course of action will vary depending on personal circumstances so it is crucial that people seek advice from a trusted source."
Angela McGowan, chief economist at Danske Bank, said the reform was more about the timing over which people were given access to their savings, rather than encouraging people to save in the long term.
"From an economics perspective this is a fairly risky strategy. While individuals might believe it to be an attractive policy - the long-term consequences from cashing in pensions could be negative in terms of increasing upfront spending at the cost of long-term income stability."
Advisers are also pointing out that making withdrawals from a pension fund is not tax-free. The first 25% lump sum is tax-free, and anything above that will be taxed.
Duane Farrell, Age NI charity director, said people should take dedicated financial advice before making such a big choice.
"Simply expanding the choices available by itself is unlikely to result in consumers becoming more empowered," he said. "It is of huge importance that those approaching retirement are able to access suitable and efficient products and take decisions which mean that they get the most from their retirement income."
Chancellor George Osborne announced the biggest changes to the pension system since the 1980s in last year's Budget. The changes mean anyone over 55 with a defined contribution pension can withdraw their entire pot. Pension minister Steve Webb (left) hit the headlines when he said if someone wanted to spend all their money on a Lamborghini and end up living off the state pension, that is their choice.
The estimated average
unsecured debt in Northern Ireland