More than 650,000 pension savers are preparing to take advantage of George Osborne’s pension reforms over the next five years, providing the government an extra £4 billion in tax, the first official analysis of the scheme has revealed.
The research suggested savers will take out around £26 billion from their pension pots over the past five years – around £40,000 per person. This will boost Treasury intake by £3.8 billion between 2015 and 2020 as pensioners will hit a higher rate of income tax.
Withdrawing more than is needed could push pensioners into a higher tax bracket without them realising, experts have warned.
Tom McPhail, head of pensions research at financial services firm Hargreaves Lansdown, said:
“A lot of people are clearly very interested in taking advantage of the new pension freedoms, however many of them probably don’t realise that they could end up losing nearly half their pension pot in tax.
“It is essential that suitable safeguards are put in place to ensure that they are alerted to the tax implications of taking all their money out. This is undoubtedly clever politics from the Chancellor but if we’re not careful he could end up creating a one-man pension mis-selling scandal.”
Experts have raised concerns that insurance firms will not provide any guidance on tax implications.
Malcolm McLean, a pensions consultant at advisory firm Barnett Waddingham, said:
“There is evidence to suggest that the majority of savers don’t understand these reforms and think they can treat their funds like a bank account. That is a major problem because if they make a large withdrawal, for example to invest in buy-to-let property, they could get stung by a 40 per cent or 45 per cent tax charge.”
Figures recently released by HMRC revealed that they expect to collect an additional £3.86 billion of income tax by 2020, the result of savers making larger withdrawals in the early years of retirement, raising the level of their retirement income tax.
In an attempt to assuage concerns about the reforms, the government plans to offer millions of pensioners free, impartial advice.
Photo by Petro Ribeiro