Thousands risking double tax hit by withdrawing large pension pots without financial advice

According to NFU Mutual, many people are risking large tax bills by cashing in pension pots without taking financial advice.

The insurance firm analysed data from the Financial Conduct Authority (FCA) and highlighted that there were over 15,000 pension pots worth more than £50,000 fully withdrawn in 2020/21, with 61.3% of them taken out without the individual obtaining any advice, a rise from 58.9% in the previous year.

Similarly, of the 2,777 pension pots of £100,000 or more which were fully cashed in in 2020/21, 60% were withdrawn without any advice, an increase from 56% in 2019/20.  

These statistics are worrying as there is the risk that retirees could end up with a huge tax bill as a result of their unadvised pension withdrawals. Individuals could find they are paying income tax at 40%, or even 45%, on part of their withdrawal (25% will be tax free, and the remainder taxed as income), as well as losing inheritance tax protection – a double tax hit for pensioners.

For those that can afford to, a pension should ideally be the last investment which is accessed in retirement due to the protection they can offer from inheritance tax (IHT). A pension, unlike other investments, is not usually classed as part of your estate, so is not subject to IHT. However, once funds are withdrawn from a pension pot, they become part of your estate and may be subject to IHT.

Cashing in a pension in full not only risks increased tax bills, but also means losing out on the tax benefits associated with any future growth and any further pension contributions limited to a maximum of £4,000 each tax year (this is called the money purchase annual allowance).

With a complex array of pension legislation and products available, it is more important than ever to seek professional and independent advice to ensure you are making the right decisions for your future.

 

Get in touch

If you are worried about your pension, concerned about market volatility or unsure about if, and when, to access your pension funds, we can help you. Speak to your usual PM+M adviser, or email financialplanning@pmm.co.uk to arrange an initial meeting at no cost to help you achieve more from your pension.

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