Pension freedoms: savers face shock tax bills and benefits cuts
Savers hit with surprise benefit cuts and huge tax bills after unlocking pension pots.
Savers are being hit with shock tax bills and benefit cuts after releasing their cash from their pension funds.
A new Citizens Advice report looked at cases of 500 people who have unlocked funds from their pots, as allowed under the new pension freedoms.
Pension freedoms guide: all you need to know
Almost one in 10 (9%) had unforeseen tax problems such as tax deductions, rising to 30% among people who took their entire pension pot in one go.
What’s more, 6% of people using the freedoms faced unexpected issues with their benefits.
This is a particular problem for savers with smaller pension pots – 11% of those with savings under £20,000 say they faced unexpected issues with their benefits.
Fortunately, almost two thirds (64%) of those who encountered problems managed to get them resolved, with 87% saying it was easy to do.
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Most savers are happy with freedoms
The pension freedoms give people more flexibility to make their retirement savings work for them, according to Citizens Advice.
More than a third (35%) of those using the pension freedoms believe it has directly improved their retirement prospects.
Only one in 20 say the freedoms have made them worse off.
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What have they done with the money?
The report also shows what savers have done with their new-found freedom:
- Almost three in 10 (29%) put money into a bank account
- Nearly three in 10 (29%) people use it to pay for daily living costs
- Just under one in five (18%) invest the money
- One in six (16%) use the money to pay off debts
Be careful when putting your money away in a current account for the long-term though.
Steve Webb, director of policy at Royal London, said:
“If pension savers are putting their money into a bank account on a temporary basis before reinvesting it, then there is less to worry about. But if they simply leave their money in an account paying little or no interest, they will see its real value decline year-after-year through inflation.”
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Guidance is paramount
Many people using the freedoms to access their pension savings are still in work and in some cases still paying into another pension pot which they have yet to make decisions about.
In response to the new research, Gillian Guy, chief executive of Citizens Advice, said:
“As people’s pension choices become more complicated Government and providers need to continue their work to promote free Pension Wise guidance, ensuring people are fully informed about their options as they move from work into retirement.”
Of those who took their pension savings to use in the near future, a third said that guidance would help them navigate their choices. A quarter said they’d find product comparison (26%) or financial advice (25%) useful.
To book a face-to-face or telephone appointment with Pension Wise, call 0800 138 3944 or visit your local Citizens Advice to book.
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