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12% of people predicted to cash in pension


200,000 people may cash in their pension pots simultaneously next year, when the Governments new pension reforms come in.

From April next year, everyone over the age of 55 will be able to cash in their pension fund. A survey has predicted that 12% of people are set to do this, but a large number of these people are unsure of the tax implications of this. Only 38% of people knew how much tax they would be paying on medium sized pension pots, while only 6% of people knew how much tax they would have to pay on a large pension pot.

Those withdrawing money are allowed to take 25% as a one-off tax-free lump sum, but thereafter are liable for tax according to their income. Someone who normally pays 20% income tax might therefore have to pay tax at 40% - if the pension money takes them over the higher rate tax threshold.
If the prediction is correct, the Treasury could be in line for a tax windfall of up to £1.6bn. The Government’s own estimate puts the extra tax income in 2015/16 at only £320m, rising to £600m in 2016/17.

Hargreaves Lansdown head of pensions research Tom McPhail says:
“Whilst 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.”

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