The Treasury could see a ‘tax windfall’ of up to £1.6bn as 200,000 pension investors get set to cash in their retirement savings, Hargreaves Lansdown has warned.

Research commissioned by the firm and conducted by Ipsos Mori, found 12 per cent of investors with a DC pension intend to take advantage of the new freedoms, taking their pension as a lump sum.

With 7.5 million between 55 and 64 and half of households owning a DC pension, the firm said based on conservative estimates it expects as many as 200,000 people to cash in their pension pots entirely next year.

Furthermore, it said based on the median pension pot value of £29,000, the tax generated for the Treasury will be between £800m and £1.6bn depending on the rate of tax the individuals are liable for.

“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 be paying unnecessarily large amounts of tax to the government,” Hargreaves Lansdown head of pensions research Tom McPhail said.

The current official estimate by the government shows an expected tax increase of £320m in the next tax year, but there is currently no explanation as to how this figure has been arrived at.

Research by the firm also highlighted that when tested about the likely tax implications, only 38 per cent can accurately state how much tax would be deducted from a medium sized pension pot. Just 6 per cent could accurately predict what rate of tax would be applied to large pension pots.

“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 them paying unnecessary tax bills or running out of money,” McPhail said.

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