Experts express concern that savers are not taking tax advice

20 Mar 2018

Financial experts are concerned that since the introduction of pension flexibility as part of the freedom and choice reforms in April 2015, Defined Contribution (DC) members (which includes Defined Benefit members who have transferred their benefits into DC arrangements to access the new rules) have failed to take appropriate tax advice before utilising their pension pot in this way.

Under the new rules, savers are no longer obligated to purchase an annuity. Instead, savers are seeking to withdraw cash lump sums in favour of the annuity option through drawdown arrangements, for example.

However, the experts are concerned 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 pension savings above this threshold, they are liable for tax.

Consequently, as a result of savers not being aware of the tax implications of withdrawing cash lump sums, it is reported that the Treasury has received a windfall of up to £5billion since the freedom and choice reforms were introduced in 2015.

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.”