Pension pot raiders could face massive tax bills

Some could lose more than half their cash

Updated: 
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Older savers planning to cash in their pension pots could be in for a nasty surprise: a tax bill that could wipe out half their savings.

From April 6, people aged 55 and over will be able to release all or part of their pension pots as a lump sum; around half a million are expected to do so over the coming months.

But new research from Fidelity, reported in Professional Pensions, reveals that few people understand the tax implications of withdrawing cash in this way. More than four in ten don't know the threshold at which lump sum withdrawals are taxed, and one in ten erroneously believe they can access their whole pot tax-free.

"There are around 150,000 people who have put off retiring in 2014/15 compared to pasts years with many waiting for the new freedoms to come into effect to take action," says Alan Higham, retirement director for Fidelity Worldwide Investment.

"What our findings show is that the tax implications of accessing your pension could be the biggest issue for this set of retirees."

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And research carried out by investment group Hargreaves Lansdown for the Daily Mail has revealed that, for some savers, the tax bill could hit 60%.

The paper gives the example of a saver earning £25,000 and with a £50,000 pension pot. When cashed in, a quarter of this comes tax free; but £37,500 is taxable. That would be added to the £25,000 salary to give a total income of £62,500 for the tax year.

This, of course, pushes the person's income into the 40% tax band, leaving them with a £11,523 bill for cashing the pension in. Separate research from insurer MGM Advantage has indicated that as many as 60,000 people could find themselves in this position.

And the tax bill's even higher for people earning more than £121,200, whose pension would effectively be taxed at 60%.

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And the new pension freedoms also have implications for those hoping to leave as much as possible to their loved ones when they die. Inheritance tax is charged at 40% on everything over £325,000; £650,000 for married couples and legal civil partners.

But while money in a pension fund isn't included in this amount, any cash released from that pension is - making it more likely that the threshold will be breached.

The advice for savers who wish to get at their pension pot is to stage withdrawals over several years to make the most of each year's tax-free allowance.

The government is promising that savers will have access to general guidance through its Pension Wise service. However, this, inevitably, won't be a personalised service, and people considering cashing in their pension pots are advised to visit a financial adviser.

Read more on AOL Money:

Make savers wait longer for pension cash, urge MPs

How pension freedom provides another tax break for the wealthy

Pension pot dippers could pay a fortune in fees

Calculate your pension income options
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