A survey of 500 Brits who have accessed their pension since April 2015 revealed one in eight - or 12% - of savers had unexpected income effects related to tax or welfare payments including emergency tax codes and deprivation of capital rules.
As a result, Citizens Advice has called on the UK government to ensure consumers can access ongoing “good quality guidance and advice” after making their initial pension choices.
Introduced in April last year, pension freedoms allow anyone aged 55 and over to withdraw as much as they like from their pension savings – although just 25% can be taken out tax free while the rest is taxable.
Citizens Advice has urged the Financial Conduct Authority (FCA) to review whether warnings over accessing more than their tax free lump sum should be made clearer or signposted.
Final salary advice
Under the reforms, the FCA also requires all consumers, including those living outside the UK, to take regulated financial advice for all transfers out of final salary or ‘guaranteed’ pension schemes for pots over £30,000 ($39,631, €35,126).
"The pension freedoms are popular with consumers but some people are experiencing unexpected losses."
Figures from HM Revenue and Customs (HMRC), which covers April 2015 to May 2016, found that a total of 391,000 people accessed their pensions flexible cash lump sum payments, taking out a combined £6.12bn.
"The pension freedoms are popular with consumers but some people are experiencing unexpected losses," said Gillian Guy, chief executive of Citizens Advice.
The survey also found that many UK savers are transferring their savings into bank accounts, proving the most popular (29%) option and is taken by a third of those with pensions worth over £100,000.
The charity said this may become increasingly common as consumers face “uncertainty about financial markets and annuity rates following Brexit”.