One in five retirees face tax shock by withdrawing over tax-free limit

Almost one in five (19%) people planning to retire this year told the insurer they would withdraw over the 25% tax-free lump sum limit, which could mean they end up paying a one-off tax bill or a higher rate of tax than they would normally.

A further 25% of savers said they would withdraw some cash from their pensions, although they added they would stay within the tax-free lump sum limit.

The findings, published in the firm's Class of 2017 study, were revealed in an online survey - conducted by Research Plus of 10,605 non-retired adults over 45-years-old in November last year. The survey also included 1,000 who plan to retire this year.

The concern is compounded by AJ Bell research released last week, which showed tens of thousands of savers were failing to claim back tax overpayments. It also follows data, published last month, which showed the tax office had earned £1.7bn more from Freedom and Choice since its introduction than it had originally anticipated.

Prudential's research also showed one in three (34%) savers planned to use their lump sums to pay for holidays, while 24% would use it for home improvements or decoration. A further 18% said they would pass money on to their grandchildren, 18% would pay off mortgages, and 14% would clear credit card debts or loans.

Prudential retirement income expert Stan Russell said it was vital these future retires have access to financial advice to ensure they understand the potential tax implications.

"Being able to withdraw lump sums from their pension pots gives savers unparalleled flexibility on how to spend their money, and it is clear that people retiring this year are making full use of this benefit," he said.

"Many of the Class of 2017 are withdrawing money to sort out their finances for retirement, with many people paying off mortgages and debts, as well as helping out family and enjoying themselves.

"However, it is clear that without careful planning, the tax man could benefit from people making the most of the newly acquired access to their pension funds."

The firm pointed to Financial Conduct Authority data, released in February, which showed fewer than half (47%) of people who withdrew money from their pension between July and September last year took advice before doing so.

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• Topics
• Defined Contribution
• Prudential
• freedom and choice
• Stan Russell
• tax