SHOCK TAX RAID ON PENSIONS
Millions hit with massive bills
MILLIONS face poverty in retirement because they fail to take tax advice before plundering their pension pot.
The Treasury is pocketing a £5billion windfall from unsuspecting savers in extra taxes following freedoms over retirement cash launched in 2015.
Many people have chosen to drawdown their savings as they are no longer obliged to buy an annuity with their money.
But experts are warning that savers do not understand that only the first 25 per cent of any cash taken out of a pension fund is tax
free and as soon as they drawdown on any savings above that threshold they are liable for tax.
There are also concerns that many will run out of money in their old age as only 10 per cent invest in an annuity.
Keith Richards, chief executive of the Personal Finance Society, said: “Our research suggests up to two-thirds of consumers are not seeking professional advice before entering into a drawdown arrangement.
“This is a genuine worry, pension pots were designed to carry one through the long retirement years, buying an income for life.
“Now it appears that barely 10 per cent of all people accessing their pension pots are opting for the safety net of an annuity. We fear many will run out of cash.”
The Treasury has forecast that it will receive an additional £5.1billion in a “bonus” tax take by April 2019 following the pension freedoms initiative of 2015 which allowed savers aged 55-plus access to their retirement funds.
According to Budget documents the Government initially estimated it would raise £300million in 2015/16 and £600million in 2016/17. However £1.5billion was raised in 2015/16 and the latest estimate for 2016/17 is £1.1billion.
If a 55-year-old has a £400,000 pension pot and is drawing down £20,000 a year from the remaining pot it would mean at least a £1,700 tax bill every year.
Mr Richards added: “The original costing assumed individuals would spread their withdrawals over four years but the latest HMRC information points to larger average withdrawals than expected – and this is a concern.
“HMRC data also suggests the average tax rate on withdrawals might be higher than originally expected which could be compounding longer-term financial detriment for thousands.”
A Government spokesman said: “Giving people freedom over what they do with their hard-earned savings, whether it’s buying an annuity or taking a cash lump sum, is the right thing to do.
“But it is important people are aware of any charges and tax implications. That is why we set up a free and impartial guidance service, Pension Wise, which has already provided 224,000 appointments in person and helped seven million people online.”