One in 10 people retiring this year face pension tax shock – here’s how to avoid it
Up to 20 per cent will risk unnecessary tax bills by taking out more than their tax-free allowance as a lump sum
ONE in 10 Brits retiring this year expect to withdraw their entire pension savings at once, risking a potential tax bill shock, according to new research.
The pension reforms of 2015 allowed those approaching retirement to access any amount of cash from their pots, with the first 25 per cent being tax-free.
This lump sum is often used at the outset of retirement to pay off a mortgage or help children onto the property ladder.
But research from Prudential found that 10 per cent of those retiring this year plan to take all their pension savings as a lump sum.
In total up to 20 per cent will risk unnecessary tax bills by taking out more than their tax-free allowance as a lump sum while more than one in three are using the lump sums to fund holidays.
But savers are not necessarily splashing their cash as more than two-thirds plan to invest in other areas such as property, a savings account or an investment fund.
The 25% tax-free amount - how does it work
There are two ways you can take your tax-free amount.
Take it all in one go
You can take 25 per cent as a lump sum without paying tax. If you do this, you can’t leave the remaining 75 per cent untouched.
You must either:
- buy a guaranteed income (annuity)
- get an adjustable income (flexi-access drawdown)
- take the whole pot as cash
Take it in chunks
You can take smaller cash sums from your pension pot without paying tax. 25 per cent of each chunk is tax free.
Expert advice
Accordingto Steve Russell from Prudential consulting a fiancial adviser in the run-up to retirement or seeking guidance from the free resources available including The Pensions Advisory Service can help to plan ahead.
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
Since the launch of pension freedom reforms in April 2015, more than 1.1 million people aged 55-plus have withdrawn around £15.744 billion in flexible payments.
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.
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.
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“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.
“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 ahead.
"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.”
We previously reporter how savers could be losing up to £300 from their pension each year due to frequent job move.
A separate report from Scottish Widow revealed almost 2 million workers in the UK are not being auto-enrolled because their earnings come from multiple jobs.
Pensions are complicated to get your head around, with one in five working Brits facing retirement poverty because they have failed to save - here is how to keep on top of your pension savings.
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