Over 15,400 people withdrew their full pension after taking a pension commencement lump sum during the 2019/20 financial year, figures from the Financial Conduct Authority (FCA) show.
Their pension pots were worth £50,000 ($64,353, €54,884) or more, and 9,085 retirees (59%) cashed them in without taking any financial advice beforehand, insurance provider NFU Mutual found.
The firm said that those who withdrew their full pension risk incurring in greater tax charges.
This is because the sum taken from their pots is added to their taxable income, meaning they will pay 40% – or 45% in some cases – of income tax on it.
Additionally, if the retiree’s total income, including the withdrawal, surpasses £100,000, they will start to lose their £12,500 tax-free allowance.
And if they continue to work after going into drawdown, their employer will only be allowed to contribute £4,000 a year into their pension.
IHT liabilities
Sean McCann, chartered financial planner at NFU Mutual, said: “Those cashing in their pension funds in full may not only suffer a significant income tax charge, they also lose the protection from tax on any future growth and inheritance tax should they die.
“Some cash in their pension funds without a clear idea of what they plan to do with the money, often putting it into a bank account.
“If investors are concerned about market volatility, talking to their pension provider about lower risk funds may help them avoid an unnecessary tax bill.
“Although it sounds counter intuitive, for those that can afford to, pensions should be the last investment they access in retirement, because of the protection they offer from inheritance tax.”
