One in ten will ‘cash in their entire pension savings’

The findings are part of the Pru’s annual research into the financial plans and aspirations of people planning to retire in the year ahead – now in its 11th year – and shows in total that one in five (20 per cent) retiring this year will risk avoidable tax bills by taking out more than the tax-free 25 per cent limit on withdrawals.

However, they are not necessarily spending all the cash – the study found the main reason given by those taking all their fund in one go was to invest in other areas such as property, a saving accounts or an investment fund (71 per cent). And interestingly research shows around two thirds (66 per cent) of people are planning on retiring early.

Since the launch of pension freedom reforms in April 2015, more than 1.1 million people aged 55-plus have withdrawn around £15.744 billion in flexible payments.

Government estimates show around £2.6 billion was paid in tax by people taking advantage of pension freedoms in 2015/16 and 2016/17 tax years with another £1.1 billion raised in the 2017/18 tax year.

The most popular use of the cash is for holidays with 34 per cent planning to spend the money on trips. Around (25 per cent) will spend the money on home improvements while one in five (20 per cent) will gift the money to their children or grandchildren. Other popular uses include buying cars or paying off mortgages.

Stan Russell, retirement income expert at Prudential, said: “Pensions freedoms allows savers to have the flexibility on how and when to spend their money without being penalised by the tax system but it is worrying that so many will withdraw more than the tax-free lump sum limit.

“The risk is even greater for those who are taking all their pension fund in cash. They not only face paying more in tax than they have to but also put their long-term retirement income security at risk.

“Consulting a professional financial adviser in the run-up to retirement or seeking guidance from the free resources available including The Pensions Advisory Service can help to plan ahead. This would ensure people access their pension in a way that benefits their long and short-term aims without giving too much to the taxman.”