Thousands of savers retiring this year will pay too much tax by cashing in their pensions.
Around one in five over 55s will take more than their 25% tax-free lump sum.
Half of those taking more than 25% of their savings will withdraw all their pension money in one go.
As a result, they risk a potential tax bill shock and could unnecessarily reduce their retirement income, says a study by financial firm Prudential.
Most – almost three out of four – are not spending the money but moving their fund in to property, savings accounts or other investments.
How pension cash is spent
And around two out of three are taking advantage of their pension freedoms to retire early.
Researchers from the Pru asked the savers how they were spending their pension cash.
Besides the 71% who are reinvesting, a third (34%) are planning holidays; 25% will spend the cash on home improvements; 20% will give the cash to their grandchildren; another 20% will buy a car and 18% will pay off a mortgage.
Stan Russell, retirement income expert at Prudential, said: “Pensions freedoms allows savers to have the flexibility on how and when to spend their money without being penalised by the tax system but it is worrying that so many will withdraw more than the tax-free lump sum limit.
“The risk is even greater for those who are taking all their pension fund in cash. They not only face paying more in tax than they have to but also put their long-term retirement income security at risk.”
Billions paid in tax
Since the April 2015 launch of pension freedom reforms, more than 1.1 million people aged 55 and over have withdrawn around £15.7 billion in flexible payments.
The government estimates show around £2.6 billion was paid in tax by people taking advantage of pension freedoms in 2015-16 and 2016-17 tax years with another £1.1 billion raised in the 2017-18 tax year.
““Consulting a professional financial adviser in the run-up to retirement or seeking guidance from the free resources available including The Pensions Advisory Service can help to plan. This would ensure people access their pension in a way that benefits their long and short-term aims without giving too much to the taxman,” said Russell.
