There are 18.5 million people aged 55 and over in the UK, meaning 1.7 million people could potentially face a surprise tax bill as they have more flexible access to their savings.
In addition, a significant one in four people (24%) don’t fully understand the tax treatment of pension income – that normally, 25% can be taken tax free with the remaining amount taxed at their marginal tax rate.
The survey also unveils that only one in four (26%) people who could have immediate access to their pension savings have a good understanding of income drawdown. This means that almost 13.5m people do not understand the main method of withdrawing cash without buying an annuity. However, this is an improvement from the 17%* of people who said they had a good understanding of pension drawdown when asked in July 2014, showing that awareness is improving as the freedoms become a reality.
Similarly, just 38% of people suggested they had a good level of understanding of annuities themselves, up from 30% previously*, while high understanding of pensions as a whole reduced from 47%* to 45%.
A significant proportion of people are planning to make use of the new pension freedoms post April. The research shows that over half (56%) are planning to access their pension savings in some format, including:
- 14% of these will take their 25% tax free cash and leave the rest invested
- 11% will take different amounts as and when they like
- 10% say they will take regular drawdown payments
- 8% will take some of the money from their fund, leaving the rest invested
- 6% want to take their whole pension as cash despite tax implications
- 7% say they will take their pot of less than £30k under trivial commutation rules
Only 14% of people plan to still purchase some form of annuity.
Adrian Walker, Retirement Planning Manager at Old Mutual Wealth, says: “It is absolutely vital that people understand the tax implications of taking income from their pension savings. The new flexibilities that come into effect next week are great but poor planning could lead to surprise tax bills.
“Having greater control over how and when you take income from your pension savings is a positive change, but there could be disastrous outcomes if people don’t take advice and understand their options better. The Government’s Pension Wise service will be an important tool in improving understanding of the choices people have of drawing income from their pension savings. However, only by seeking full professional advice will people be able to receive personalised recommendations tailored to their individual circumstances.”
* Source: Old Mutual Wealth Retirement Income Uncovered report – Dec 2014
All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 1023 adults aged 55 and over. Fieldwork was undertaken between 11/03/2015 - 17/03/2015.