More than a third of defined contribution (DC) pension scheme members at pre-retirement age are unaware of the amount they can withdraw tax free, new research has uncovered.
UK savers can usually withdraw up to 25% of the money built up in any pension as a tax-free lump sum.
However, a survey of DC pension scheme members aged 50-65 by Hymans Robertson found that 38% were unaware of their tax-free pension allowance.
Furthermore, 32% thought, incorrectly, that they could withdraw their entire pot without paying tax, while 17% wrongly believed that pension income is not taxed at all.
Kathryn Fleming, partner at Hymans Robertson, said that “a toxic mix” of inadequate pensions knowledge, a reprioritisation of finances throughout the pandemic, and poor workplace support, are creating an “ever-widening financial literacy gap”.
“It is clear that those at a stage when they should be knowledgeable about their pension choices still have huge misunderstandings,” she continued.
“Decisions made in haste are likely to have far reaching consequences for this age group. Without a real change, many are at risk of making grave financial errors as they approach retirement.”
This comes after a separate survey earlier this year found that the differences in understanding of pension taxation are particularly acute between men and women.
A third of women polled had no knowledge of tax relief, compared to a fifth of men, while a further 33% of women said they had some understanding of how pension tax relief worked, in comparison to 59% of men.
Fleming said that the onus is on employers, under their guidance role, to help narrow the financial literacy gap through a combination of education and workplace tools.
“As life starts to return to normal, we would urge employers to ensure that they have the right workplace support in place for their staff. Otherwise, we could be facing a lost generation to pensions tax.
She added: “There should be a moral responsibility for employers to help protect future generations from this confusion and to guide them into making the right financial decisions for their retirement.”
Image credit: iStock
Author: Chris Seekings