Pension changes 2015: you could be hit with a fine

As hundreds of thousands of pensioners prepare to start using their pension pots like current accounts for the first time, it's emerged that many could unwittingly be hit with large fines.

In the past, savers were obliged to use their pension pots to buy an annuity, paying an income for life. Under the new rules, though, they are allowed to take all or part of the pot in cash, with 25% tax-free. As many as 200,000 savers are expected to take advantage of the new rules when they come into force next April.

However, the Daily Mail has spotted small print in the new rules which says that people withdrawing cash from one pension must inform any other insurer they have a pension with within 31 days or face a £300 fine. After that, the penalty racks up by £60 a day, to a maximum of £3,000.

The problem with this is that many people don't know what pensions they've got. People now hold an average of six jobs across their lifetime, and many simply forget about tiny pension pots from early on in their career.

In addition to this, more than five million pensions were set up with companies that have now gone out of business, many of which are now under different ownership.

Indeed, government figures show that more than a million pensions, worth a total of £3 billion, have been abandoned in dormant accounts, and Age UK says one in four people say they've lost track of at least one.

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"Even without the threat of fines, these rules will force people to spend hours finding old pensions paperwork for no real reason," says Malcolm McLean, senior pensions consultant at actuarial firm Barnett Waddingham.

"It is another burden savers must deal with if they want to enjoy the freedoms."

The reason for the fines is to deter pensioners from so-called pension recycling, in which people withdraw cash from a pension pot and put it straight back again to get extra tax relief.

HM Revenue & Customs tells the Mail that it hopes to avoid charging penalties. "They would normally only apply in extreme cases, where there was a calculated deliberate failure to pass on information," a spokesman said.

The revelation, though, will add to existing concerns that pensioners are not well-enough informed about the implications of cashing in their pensions, particularly when it comes to tax.
Figures from financial services group Hargreaves Lansdown indicate that the government can look forward to a tax windfall of as much as £1.6 billion when the new rules come into force - with many of these tax-payers caught unawares.

Read more about pension reforms on AOL Money:

Pension pot generosity could land baby-boomers in trouble

Many could face huge tax bill on their pension

Pensioners to be targeted by new wave of fraudsters