Most of us are muppets when it comes to spending our pension pot.

“It’s extremely worrying that so many more people are withdrawing funds from their pensions and at higher rates,” said Alice Guy, head of pensions and savings at investment platform Interactive Investor – (FT)

The news is that we are spending our pension pots harder than ever. This may be worrying to some but it’s comforting to those who have windfall savings in pensions that they can use to meet the unexpected rise in their cost of living.

Between April and June this year, £4bn of taxable pension payments were withdrawn from retirement pots by 567,000 individuals, according to the latest data from HM Revenue & Customs.

This compared with £3.4bn of withdrawals in the previous quarter made by 519,000 individuals. The average withdrawal in April to June was £7,100, nearly a fifth (17 per cent) higher than withdrawals in the same quarter in 2022.

We are spending more and in the absence of income to meet expenditure , we are drawing on our reserves. This is not in itself worrying, unless you run a business that depends on you maintaining your money in the pension pot.

What is worrying is that we know so little about consumption trends. Are people working to a plan or is this really “raiding”?

I acknowledge that we have the right to do as we please with our money, but I would ask you, dear reader, to recognise that the money in your pension pot is a mixture of contributions you made, your employer made and money the tax-person paid in as an incentive to keep you saving.

It is in the public interest that the money saved gets recirculated and that tax is reclaimed where tax is due. It is also in the public interest that the money saved is spent in a way that ensures that people do not recklessly overspend leaving themselves vulnerable and destitute in later years.

For this reason, the Government has devised a tax system that offers people further tax incentives in retirement , to plan their retirement spending in a systematic way. There are two options available to us savers  – illustrated by Which- below

The uncrystallised route, where each withdrawal  comes partly tax-free boost the spending power of small withdrawals – effectively offering a lower marginal rate if money is spent this way

The crystallised route means that a quarter of the pot can be withdrawn at outset “tax-free” and this can become rainy day savings money – giving comfort of cash in the bank which can be spent to meet exceptional items. That’s the way the Government would  to tax incentivise prudent spending plans.

Unless you are very “pension aware” or have an adviser who is helping you. The organisation of your retirement spending is likely to be random and probably incompetent. Nobody really talks to each other, least of all the saver and the tax-person.

So lump sums are often taxed initially and that tax repaid when it becomes clear t The hat someone is trying to draw using “crystallisation”. HMRC have a habit of seeing any withdrawal as “income” and likely to continue – even if you are taking a one-off payment.

We really should have got this sorted by now

It’s been over seven years since the tax-rules changed so that we could take our pot how we liked (pension freedom). The great disruption is not over. We hear that HMRC are looking to change the death taxes on pension pots when their owners die. There is still uncertainty about the LifeTime Allowance and the rules governing future payments into pension pots, once the pot has been “raided” are still uncertain. Many rules depend on the type of pension being drawn and whether it is drawn as a pension or as a lump sum. “Crystallisation” events are obscure and are often triggered inadvertently.

The FT reportsthat HMRC data showed that 53,330 savers breached their AA in the 2021-22 tax year — a 21.5 per cent increase on the 43,870 the previous year.  The total value of contributions reported via self assessment as exceeding the AA was £1.2bn in 2021-22 — up from £814mn in the previous tax year.

I spoke with a senior pension regulator yesterday about this. She told me that she could work out the tax-rules herself (with some pride). She told me she didn’t need an IFA (with some pride). She implied that needing to pay for financial advice was a failing in the system. Sadly most people – whether they have big or small pots can’t work things out for themselves, take poor decisions and live to regret the consequences. We cannot have a system where it is only the few who get it and the many who fall foul of taxes they don’t understand. We really should have got this sorted by now.

Paying pensions as pensions

I spoke at yesterday’s conference under Chatham House rules. I have asked myself if I can report what I said and myself has said I can.

I was asked what I saw the future of DB pension as being. I said that defined pensions, whether paid as an insurance annuity or as a scheme pension from a fund were what most people thought they would get at retirement and that – as regards retirement – we should try to replace the current savings culture with a pensions culture.

People should be free to reject freedom and buy the house wine – the pension option.

The senior pension regulator in the audience was seen to smile approvingly.