Savers risking 'big' tax bills through unadvised full pension withdrawals

Thousands of people have risked incurring 'big' tax bills by fully cashing in pension pots without taking financial advice, new analysis from NFU Mutual has stated.

NFU Mutual’s analysis of Financial Conduct Authority data showed that of all the 15,296 pension pots worth over £50,000 that were fully withdrawn in 2020/21, 61.3 per cent were taken out without any advice.

This indicated a rise in the proportion of people cashing in their pension pots without advice, up from 58.9 per cent the year before.

A similar trend was seen with full withdrawals of larger pension pots, with 59.3 per cent of savers cashing in pots worth over £100,000 without taking advice in 2020/21, a 3.2 percentage point increase on the previous year.

This pattern could incur consequences as those who fully cash in large pots risk paying up to 45 per cent income tax on part of their withdrawal whilst also losing inheritance tax protection, NFU Mutual warned.

The proportion of savers who took advice before fully withdrawing pension pots worth over £50,000 fell from 28.3 per cent to 25.9 per cent over the period, while the proportion using Pension Wise increased slightly from 12.7 per cent to 12.8 per cent.

NFU Mutual chartered financial planner, Sean McCann, commented: “Those chasing in large pension funds not only risk a large income tax bill, they also lose the favourable tax treatment on any future growth as well as exposing the money to a potential inheritance tax charge.

“Some cash in their pension funds without a clear idea of what they plan to do with the money, often putting it into a bank account.

“Although it sounds counter-intuitive, for those that can afford to, pensions should be the last investment they access in retirement, because of the protection they offer from inheritance tax.

“It’s concerning that more people are fully cashing in large pension pots without taking advice first.

“If investors are concerned about market volatility, talking to their pension provider about lower risk funds may help them avoid an unnecessary tax bill.”

In addition, McCann explained how cashing in will not just affect a saver’s current pot but also their ability to save in future by pointing out that those who cash in and continue to work will have the amount they and their employer can pay into pension “reduced to £4,000 each tax year”.

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