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Hargreaves study: 200k to cash in pension pot next April

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Up to 200,000 people will cash in their pension next year, netting the Treasury an additional £1.6bn in tax, according to research from Hargreaves Lansdown.

An Ipsos Mori survey commissioned by Hargreaves found more than one in ten, or about 12%, of savers with a defined contribution (DC) pension said they would take all of their pension in one go when rules chance next April.

However, when questioned about the tax implications of such a move only two in five, 38%, could accurately state how much tax would be deducted from a medium sized pension pot.

The proportion who could accurately predict what rate of tax would be applied to large pension pots was less than one in ten (6%).

Hargreaves Lansdown said the information gap was a “significant cause for concern” in light of the substantial numbers of people planning to take up the freedoms next year.

Head of pensions research Tom McPhail (pictured) said: “While we support the basic principles behind the government’s reforms, the speed and complexity of these changes mean that a lot of investors are going to paying unnecessarily large amounts of tax to the government. The Chancellor has effectively engineered a tax windfall for the government from unsuspecting pension investors.

“There is an urgent need for the government to think again about how to effectively regulate these new freedoms. We want investors to take responsibility for and to engage with their savings but we also don’t want then paying unnecessary tax bills or running out of money.”

Hargreaves said the 200,000 figure was based on the number of people who are “treading water” having become eligible to take retirement income but not yet bought an annuity ahead of April 2015.

It said by next April there are likely to be as many as 200,000 retired pension investors waiting to get access to their savings.

It said: “With around 7.5 million people aged between 55 and 64 and half of households owning a DC pension, even based on conservative estimates we expect as many as 200,000 people to cash in their pension pots entirely next year.

Based on the median pension pot value of £29,000, the tax generated for the Treasury will be between £800m  and £1.6bn, depending on the rate of tax the individuals are actually liable for (the lower estimate is based on a 15% tax rate, the higher estimate on a 30% tax charge).

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