28th October 2014
Up to 200,000 people are poised to cash in their pension pots next year when new freedoms come into force, a survey has found.
From next April, all over-55s will be allowed to take all their savings out of their pension funds as restrictions are lifted.
A study by Hargreaves Lansdown, the adviser, has found that up to 12% of people with defined contribution pension savings plan to do so.
But only a third of those quizzed knew how much tax would be charged if they cashed in their pension pot.
Hargreaves calculates that the Treasury could receive a windfall of up to £1.6 billion in taxes, if as many people decide to cash in their pensions as the survey suggests.
Sales of annuities have halved since the Budget, as investors who would normally have arranged a retirement income by now, are treading water waiting to see what their options are.
By next April, there are likely to be as many as 200,000 retired pension investors waiting to get at their retirement savings.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: ‘Whilst we support the basic principles behind the government’s reforms, the speed and complexity of these changes mean that a lot of investors are going to paying unnecessarily large amounts of tax to the government. The Chancellor has effectively engineered a tax windfall for the government from unsuspecting pension investors.”
“There is an urgent need for the Government to think again about how to effectively regulate these new freedoms. We want investors to take responsibility for and to engage with their savings but we also don’t want then paying unnecessary tax bills or running out of money.”
As part of the new freedoms, the government is also introducing free guidance to help investors with their retirement decisions. However, Hargreaves said there are several problems with this guidance.
In a recent pilot study, just 2.5% of investors took up the offer of free retirement guidance, plus the tax treatment of pensions funds is complicated and the free guidance won’t be able to tell investors how much tax they will actually have to pay.