Thousands withdraw pension cash only to ‘leave it in the bank’

Tens of thousands of people are withdrawing large sums from their pension pots only to leave the money languishing in low-interest bank accounts.

Since April last year anyone over the age of 55 can cash in their entire private pension and only pay tax at their marginal rate.

But many appear to be making withdrawals without any clear need to spend it, resulting in a loss of returns and potentially avoidable tax bills, according to research undertaken by Citizens Advice.

The charity found that one in three people making pension withdrawals, or 29pc, went on to put the money in a bank account.

Apart from the loss of returns, pension withdrawals can have disastrous tax implications.

While 25pc of pension savings can be withdrawn free of tax, withdrawals after that are taxed like any other income. Substantial withdrawals can thus trigger large tax bills, or push basic-rate taxpayers up into a higher-rate bracket.

Once money is withdrawn from a pension it loses further tax perks. Capital gains within pensions, for example, are tax free. And pension assets do not count toward an individual’s estate for inheritance tax purposes.

HMRC says around 232,000 people have made use of the new pension rules so far.

Steve Webb, the former pensions minister and now director of policy at Royal London, said people leaving cash in a bank account was his “biggest worry”.

He called on the Government to tell people they could leave their pension untouched until they needed the income.

“The real worry is the money is put into current accounts, because they are familiar, and then just sits there eroding. Even if inflation is low, it is higher than interest earned.”

The graph, left, shows how cash in the average savings account is now losing real value.

Three in four 18 to 35-yearolds want to save but most are prevented from doing so by the cost of living and high rents, according to the Pensions and Lifetime Savings Association. Those who do save have short-term goals and show “comparatively little” interest in investing in the stock market.