Dubai: On April 6 a new pension set of rules came in into force in the UK, dubbed pensions freedom. These rules say that anyone aged over 55 has the freedom to take control of their pension and their retirement income.

The headline is that you can withdraw your entire pension pot and blow it on a supercar — as suggested by the UK Pensions Minister — if you want to. And that is a potentially a huge problem. Pensions are designed to be used to generate an income during your retirement, not to be spent on depreciating assets.

Giving people control of the large sums of money in their pension pots is undoubtedly a vote winner, but one that has some long term issues. While life expectancy is steadily rising, most people still wish to retire around 65 or even earlier — a cut off age introduced in the early 1960s when the average life expectancy was 64. But this now means many people expect their pension to fund almost 20 years of retirement as average life expectancy is now close to 83.

This means that you need to have a lot of money set aside in order to avoid spending your golden years on the breadline. Research shows that in order to replicate the average UK wage of £26,000 in retirement you would need a pension pot of over £400,000.

The sad reality is that most people do not have enough set aside. This is a situation that is likely to be made worse by the new pension freedoms. This is because many over 55 may withdraw their pension pots from the investments they are currently in and either spend it or put the proceeds into cash accounts instead.

Not only could this lead to a substantial tax bill, it will also bring the growth of those pension pots to a juddering halt.

The next few months could prove highly lucrative for the UK Treasury. The tax rules surrounding pension freedom are widely misunderstood and many people are expected to face hefty tax bills when they cash in their pensions.

This is because only the first 25% that you take out of the pension pot is tax-free. Anything else you withdraw is potentially subject to income tax — dependent on the type of structure the pension is held in. This means that if someone with £100,000 in their pension and they withdrew it all they could have to pay more than £25,000 straight to HMRC in tax.

Another reason the new pension freedoms are a concern is the worry that people will withdraw their pension pots from long term investments such as stock market investments put the money into cash.

While obviously lower risk, the growth rate on cash is pitiful. It has been for years, and that is unlikely to change in the next few years so, ditching the stock market also means stalling the pension growth, and given it has to provide an income for many years, even from the point of retirement, cash is unlikely to be the most appropriate place to invest the money.

At present many people are unprepared for the pension changes. Research by in the UK has found that up to 80% of adults do not understand the new pension rules. Being an expatriate offers possibilities that are not available to UK residents, but caution should be applied — why do you want to take your fund as cash? Do you have a strategy to generate an alternative income? These issues can be avoided by taking appropriate professional advice to walk members through the options that the new rules have presented and find the most suitable solution for you.

— James Thomas is Regional Director at DeVere Acuma