Savers making use of the pension freedoms are facing unexpected tax and welfare losses, according to new research.

A survey of 500 people who have accessed their pension since the freedoms were introduced in April 2015, conducted by ComRes for Citizens Advice, found one in eight (12 per cent) consumers have had unexpected income effects related to tax or welfare payments.

Overall, 9 per cent of people had unforeseen tax problems- such as tax deductions they weren’t expecting. This rises to 30 per cent among people who took their whole pension pot in one go.

The research also found that 6 per cent of people using the freedoms faced unexpected issues with their benefits, such a reduction in welfare payments. This is a particular problem for people with lower pension savings. 11 per cent of people with pension pots worth less than £20,000 say they have faced unexpected issues with their benefits.

Of those who experienced tax or benefit problems after using the pension freedoms two thirds (64 per cent) managed to get these resolved and the large majority (87 per cent) said this was easy to do.

Citizens Advice chief executive Gillian Guy said: “The pension freedoms are popular with consumers but some people are experiencing unexpected losses.”

“In a minority of cases people are being caught out by unexpected consequences of using the pension freedoms, such a being hit by tax deductions or a cut to their benefits. As people’s pension choices become more complicated government and providers need to continue their work to promote free Pension Wise guidance, ensuring people are fully informed about their options as they move from work into retirement.”

In addition, results showed that many consumers are transferring their savings into bank accounts. This is the joint most popular option (29 per cent of all consumers) and is taken by a third (32 per cent) of those with pensions worth over £100,000.

Citizens Advice warned that this may become increasingly common following uncertainty about financial markets and annuity rates following Brexit.

However, it found the proportion who plan to use their pensions for luxury spending (22 per cent) is not disproportionately higher than the proportion who expect to spend on investments (18 per cent) or paying off debts (16 per cent).

More concerning, the survey found that more than three in five (61 per cent) have not got any plan of how they would fund their care costs, despite the fact around half of older adults have care needs.

Of those who don’t have a plan for paying for future care costs, Citizens Advice found 10 per cent would rely on others, such as family or the government.

Almost one in three (29 per cent) say they have thought about future care costs but have no plan about how to meet these. Three in five (60 per cent) say they have not thought about how they’d pay for future care needs.

Guy said: “Care costs can be a heavy financial burden that many people are unprepared for. It is unsurprising that many people in their fifties are not thinking about how they will pay for care costs when the need for this could be 10, 20 or even 30 years away. But this issue does need some attention, otherwise people risk dipping into their pension now only to find they need some of the money later."

Overall the survey found pension freedoms to be popular with consumers. In total, 35 per cent of consumers who have used the freedoms say that they have directly improved their own retirement prospects, with many more saying they welcome the change despite not using it themselves. Just one in twenty (5 per cent) consumers say the freedoms have harmed their prospects.

Commenting on the survey, Intelligent Pensions head of pathways Andrew Pennie, said: “The findings of the survey are disturbing and another indication that there is still a huge amount to be done if pension freedoms are to be the success we all want them to be.

“We have seen evidence of people using drawdown who shouldn’t be or in a way that will jeopardise their future retirement income and while we anticipated a lot of people with small pots to cash-out, it’s genuinely shocking that a third of those surveyed with pots over £100,000 are cashing out and keeping their money in the bank. Not only is this likely to result in a poor outcome from a tax perspective but completely fails to address the need to provide a sustainable retirement income against the risks of living too long and the impacts of inflation.”

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