More than one in three DC savers at retirement planning age are unaware they can make tax-free withdrawals from their pension, according to research from Hymans Robertson.
This survey showed there was widespread confusion about the way pension savings are taxed with a further 32 per cent thinking they can withdraw their whole pension tax-free.
Almost a fifth of respondents (17 per cent) wrongly thought they didn’t have to pay income tax on any pension withdrawals.
Hymans Roberston says this lack of knowledge and understanding is putting an increasing number of people at risk of making grave financial errors as they approach retirement.
It pointed out DC pension members can withdraw 25 per cent of their pension each year tax free, but they will be liable to pay tax on any withdrawals above this. They also have to pay income tax on any pension income that contributes to overall income above their annual tax-free allowance so it the income isn’t deemed to be tax free.
Hymans Roberston partner Kathryn Fleming says: “The results of our survey create a worrying picture. A toxic mix of a lack of pensions knowledge, a reprioritisation of finances throughout the pandemic and poor workplace support are creating an ever-widening gap between those with strong financial literacy and those with significant gaps in their understanding.
“It is clear that those nearing retirement, and at an age when they should be knowledgeable about their pension choices, still have huge misunderstandings. With a limited time-frame to make a change, there is at worst, a real risk of enormous tax bills for many members as a result of irreversible poor decisions. In the short-term members could be missing out on simple tax benefits to help manage their day-to-day finances and avoid future financial disasters.
“We would urge those people who are reaching the age to make retirement decisions to revisit their pension pots and to take advantage of any help provided by their employer or pension provider. Helpful free government resources such as Money Helper can assist with identifying gaps. These resources can offer support to individuals before it’s too late.”