Pensioners stand to lose £3.6bn in additional tax payments from next
April as concerns grow that the freedom from annuities unveiled by George Osborne as the centrepiece of the 2014 budget will create a new "mis-selling scandal".
In the budget, Osborne said he would "remove all remaining tax restrictions" and give pensioners "complete freedom to draw down as much or as little of their pension pot as they want, anytime they want". But detailed figures released after the budget revealed that the new freedoms would be a tax trap for many pensioners, boosting Treasury coffers by an extra £320m in 2014-15, rising to £1.2bn by 2018-19. Further estimates published this week suggest that the additional tax take will shrink slightly to £810m in 2019-20.
Critics are predicting a wave of mis-selling from April 2015, as pensioners are encouraged to cash in their pension pots to invest in buy-to-let property, unaware of the huge one-off tax charge they face. The Treasury is estimating that around 130,000 pensioners at retirement will take advantage of the new flexibility, with the pensions minister, Steve Webb, claiming that savers will be free to blow the lot on a Lamborghini, if they wish.
But the tax implications of cashing in pension pots has only emerged in detail since the budget. Figures compiled by Hargreaves Lansdown indicate that someone with a £100,000 pension pot will pay £34,500 in tax if they take the money as cash on retirement. Some retiring workers, who have only ever paid tax at the basic rate during their working lives, could find themselves thrown into the top rate of tax on retirement if they want to access all the money in their pension fund immediately.
Tom McPhail, the head of pensions research at Hargreaves Lansdown, said: "Tax could easily wipe out a sizeable chunk of people's pension savings, potentially taking many people into the higher rate tax band who have never paid tax at that rate before. Trusting people to act responsibly with their pension savings is a huge step forward but it is essential to back this with the right guidance and advice."
He added: "If he is not careful, the chancellor could end up creating a one-man pensions mis-selling scandal."
Retirement specialists Saga said fears that pensioners will have their savings decimated by tax are exaggerated. Spokesman Paul Green said: "We polled 2,400 over 50s and found they wanted to be responsible with their newfound pension freedom. Just 15% of over 50s still working told us they plan to cash in their full pension pot and we found just 23 people who said they planned to blow it on a Lamborghini and living the high life.
"Over half say they plan to use funds to secure a future income for their retirement. It is vital that people are properly advised about the tax implications of withdrawing more than 25% of their pension pot before they do something that they may live to regret."
The government has promised that retiring workers will from next year receive independent guidance on what to do with their money. Ros Altmann, the government's "older workers champion", said: "The whole point of the guidance is that it will, among other things, tell people about the tax implications, so I don't see this as a big risk. However, there is a big question mark over whether the Money Advice Service will have the resources and be able to up its game to meet the challenge."
The Money Advice Service is a free and impartial advice service set up by the government funded by a levy on financial firms by the Financial Conduct Authority.
In the budget, Osborne said he would "remove all remaining tax restrictions" and give pensioners "complete freedom to draw down as much or as little of their pension pot as they want, anytime they want". But detailed figures released after the budget revealed that the new freedoms would be a tax trap for many pensioners, boosting Treasury coffers by an extra £320m in 2014-15, rising to £1.2bn by 2018-19. Further estimates published this week suggest that the additional tax take will shrink slightly to £810m in 2019-20.
Critics are predicting a wave of mis-selling from April 2015, as pensioners are encouraged to cash in their pension pots to invest in buy-to-let property, unaware of the huge one-off tax charge they face. The Treasury is estimating that around 130,000 pensioners at retirement will take advantage of the new flexibility, with the pensions minister, Steve Webb, claiming that savers will be free to blow the lot on a Lamborghini, if they wish.
But the tax implications of cashing in pension pots has only emerged in detail since the budget. Figures compiled by Hargreaves Lansdown indicate that someone with a £100,000 pension pot will pay £34,500 in tax if they take the money as cash on retirement. Some retiring workers, who have only ever paid tax at the basic rate during their working lives, could find themselves thrown into the top rate of tax on retirement if they want to access all the money in their pension fund immediately.
Tom McPhail, the head of pensions research at Hargreaves Lansdown, said: "Tax could easily wipe out a sizeable chunk of people's pension savings, potentially taking many people into the higher rate tax band who have never paid tax at that rate before. Trusting people to act responsibly with their pension savings is a huge step forward but it is essential to back this with the right guidance and advice."
He added: "If he is not careful, the chancellor could end up creating a one-man pensions mis-selling scandal."
Retirement specialists Saga said fears that pensioners will have their savings decimated by tax are exaggerated. Spokesman Paul Green said: "We polled 2,400 over 50s and found they wanted to be responsible with their newfound pension freedom. Just 15% of over 50s still working told us they plan to cash in their full pension pot and we found just 23 people who said they planned to blow it on a Lamborghini and living the high life.
"Over half say they plan to use funds to secure a future income for their retirement. It is vital that people are properly advised about the tax implications of withdrawing more than 25% of their pension pot before they do something that they may live to regret."
The government has promised that retiring workers will from next year receive independent guidance on what to do with their money. Ros Altmann, the government's "older workers champion", said: "The whole point of the guidance is that it will, among other things, tell people about the tax implications, so I don't see this as a big risk. However, there is a big question mark over whether the Money Advice Service will have the resources and be able to up its game to meet the challenge."
The Money Advice Service is a free and impartial advice service set up by the government funded by a levy on financial firms by the Financial Conduct Authority.
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