Thousands of people are risking big tax bills by cashing in large pension pots in full without taking financial advice, according to latest research.
NFU Mutual analysed Financial Conduct Authority data and found there were 15,296 pension pots worth more than £50,000 fully withdrawn in 2020/21, with 61.3% of them taken without any advice. This had risen from 58.9% the year before. Of the 2,777 pension pots worth more than £100,000 that were fully cashed in, six in 10 were taken without any advice, up from 56% the year before.
People who cash in large pots in one go risk paying 40% or even 45% income tax on part of their withdrawal while also losing valuable inheritance tax protection, NFU Mutual warns.
“Those cashing in large pension funds not only risk a large income tax bill, they also lose the favourable tax treatment on any future growth as well as exposing the money to a potential inheritance tax charge,” said chief financial planner Sean McCann. “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.
“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.
“It’s concerning that more people are fully cashing in large pension pots without taking advice first. If investors are concerned about market volatility, talking to their pension provider about lower risk funds may help them avoid an unnecessary tax bill.”
The proportion of savers who took advice before fully withdrawing pension pots worth more than £50,000 fell from 28.3% to 25.9% over the period, while the proportion using Pension Wise increased slightly from 12.7% to 12.8%.
