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Are you paying too much tax on your pension?

Written by: Emma Lunn
Thousands of retirees are at risk of a double tax whammy by cashing in large pension pots without taking advice, according to NFU Mutual.

Analysis of Financial Conduct Authority (FCA) data from financial advisers at the mutual shows there were 15,296 pension pots worth more than £50,000 fully withdrawn in 2020/21, and 61.3% of them were taken without any professional advice. 

This had risen from 58.9% the year before. Of the 2,777 pension pots worth more than £100,000 that were fully cashed in, six in 10 were taken without any advice, up from 56% the year before.

Those who cash in large pots in one go risk paying 40% or even 45% income tax on part of their withdrawal while also losing valuable inheritance tax protection. 

Sean McCann, chartered financial planner at NFU Mutual, said: “Those cashing in large pension funds not only risk a large income tax bill, they also lose the favourable tax treatment on any future growth as well as exposing the money to a potential inheritance tax charge.

“Some cash in their pension funds without a clear idea of what they plan to do with the money, often putting it into a bank account. Although it sounds counter-intuitive, for those that can afford to, pensions should be the last investment they access in retirement, because of the protection they offer from inheritance tax.

“It’s concerning that more people are fully cashing in large pension pots without taking advice first. If investors are concerned about market volatility, talking to their pension provider about lower risk funds may help them avoid an unnecessary tax bill.”

NFu found there were 1,646 people who cashed in a full pension pot of more than £100,000 without taking financial advice, putting themselves at risk of an even bigger tax problem. 

McCann said: “This is significant because once your total income – including taxable pension withdrawals – exceeds £100,000, you start to lose your £12,570 tax-free personal allowance. 

“Those who continue to work after taking a taxable sum out of their fund will also see the amount they and their employer can pay into pension reduced to £4,000 each tax year.”  

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