Business

Thousands set to cash in pension pots next year

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Up to 200,000 people are set to cash in their pension pots all in one go next year, according to new research.

From April 2015, all those over the age of 55 will have the freedom to take all their savings out of their pension fund, if they wish.

As many as 12% of those with pension savings will do so, says the investment adviser Hargreaves Lansdown.

In response, the Treasury insisted that people should be free to do what they like with their pensions.

If the estimates prove accurate, the government could be in line for a tax windfall of up to £1.6bn.

But the research also showed widespread ignorance on how much tax is payable on such withdrawals.

Only just over a third of those questioned in a survey knew how much tax would be deducted if they cashed in a medium-sized pension pot.

Those with larger savings were even less likely to know what their tax bill would be.

More than 1,000 adults with defined-contribution scheme pensions were questioned by Ipsos Mori for the research.

Guidance

Tom McPhail, the head of pensions at Hargreaves Lansdown, called on the government to provide more protection for consumers who do withdraw large sums from their pension pots.

"We want investors to take responsibility for, and to engage with, their savings, but we also don't want then paying unnecessary tax bills or running out of money." he said.

He has previously warned that the ability to withdraw money so easily from a pension fund has the potential to create a mis-selling scandal.

But the government said it was right that people could do what they liked with their pension savings.

"That freedom is a key part of our long-term economic plan," said a Treasury spokesperson.

Those withdrawing money are allowed to take 25% as a one-off tax-free lump sum, but thereafter are liable for tax according to their income.

Someone who normally pays 20% income tax might therefore have to pay tax at 40% - if the pension money takes them over the higher rate tax threshold.

As part of the new freedoms, the government has promised that people will be given free guidance on how to manage their pensions.

The chancellor confirmed last week that such help will be delivered by the Citizens Advice service.

However, there are still questions about how useful the advice will be.

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