More than 300,000 people aged 55 to 64 fully emptied their pension pots when first accessing them in the year to March, potentially exposing themselves to unexpected tax bills, according to analysis by financial advice firm NFU Mutual.

A total of 319,265 people in the age group fully encashed their pensions at first access, with almost half of the 1.047 million pension pots accessed for the first time during the year being completely withdrawn, according to Financial Conduct Authority (FCA) data.

While 25% of a pension pot can usually be taken tax-free, the remaining 75% is added to taxable income for that year. This can push people who are still working into the 40% or 45% higher tax bands and, where total income exceeds £100,000, can result in the loss of the personal allowance and an effective 60% tax rate on part of their income.

According to NFU Mutual, 337,823, or 70%, of the 479,485 pots fully encashed were withdrawn without the owner taking regulated advice or guidance from Pension Wise.

It also warned that taking taxable pension income can trigger the Money Purchase Annual Allowance, reducing the amount that individuals and employers can subsequently contribute to a pension to £10,000 a year.

Sean McCann, chartered financial planner at NFU Mutual, said: “Many people do not realise that emptying pension pots in one go can trigger a significant tax bill. Tapping into a pension after you reach 55 can be enticing but taking a taxable payment limits how much you and your employer can subsequently pay into your pension. Considering many workers over 55 will be at the peak of their earnings they risk missing out on contributions from their employer as well as valuable tax relief."

He cited the example of someone earning £50,000 who cashes in a £100,000 pension, including a £25,000 tax-free lump sum, with taxable income rising to £125,000 and their income tax bill increasing from £7,486 to £42,432.

McCann added: "Many people cashing in their pensions do so without a clear idea of what they plan to do with the money, often putting it into a bank account. Whilst money is in a pension any growth is free from UK income tax, capital gains tax and until April 2027 free of inheritance tax. Money taken out of a pension is often exposed to some or all of these taxes."

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