Advice firm issues tax warning over large pension pot withdrawals

The number of people fully withdrawing pension pots that could trigger large tax bills is on the rise, analysis from NFU Mutual has indicated.

According to FCA data analysed by the financial advice firm, of the 705,666 pensions accessed for the first time in 2021/22, more than half (395,237) were fully withdrawn.

Although more than 260,000 of these full withdrawals were for smaller pots with less than £10,000 in them, figures showed the number of pensions over £50,000 that were fully withdrawn saw a 15.5% increase, from 15,296 to 17,661.

NFU Mutual also found that more than 10,000 of these withdrawals were taken without seeking financial advice – leaving those people at risk of paying more tax than they need to.

Any amount taken over their tax-free cash is added to their other taxable income, meaning many will pay 40%, and in some cases 45% in income tax, on some or all of it. For those whose total income exceeds £100,000, including the taxable pension withdrawal, they start to lose their £12,570 tax-free allowance.

Those who continue to work after taking a taxable sum out of their fund will also see the amount they and their employer can pay into pension reduced to £4,000 per tax year. 

Chartered financial planner at NFU Mutual, Sean McCann, commented: “Fully withdrawing a pension can spark an unnecessary tax bill and leave retirees with limited funds for the future.

“Although more than 260,000 of these full withdrawals were for smaller pots with less than £10,000 in them, there are still thousands of people cashing in pensions worth significant sums.

“Cashing in pension pots of more than £50,000 will push many into the 40% or 45% income tax band and leave them with a large tax bill they weren’t expecting. In many cases the tax bill can be reduced by phasing withdrawals over a number of years.”

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