New Aegon research highlights tax trap risk for millions of over 55’s

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  • Most over 55s planning to access their pension when the new freedoms come into play from 6 April intend to keep it as savings rather than go on a spending spree
  • But on moving out of their pension more than 2.6million individuals could be heading for a huge tax trap they could easily avoid

New research from Aegon UK has revealed that many over 55's aren’t aware of the tax implications of accessing their pension after 6 April.

  • More than a third (35%) of over 55s don’t know which tax bracket they fall into
  • 36% of over 55s aren’t aware of the tax implications of accessing their pension pot
  • 31% of over 55s surveyed are planning to access their pension when new flexibilities come in on 6 April
  • The most popular option over 55s would choose to reinvest is in cash ISAs (31%), followed by putting it into a bank account (23%) and using it to go on holiday (19%) or pay debts (19%)
  • More than a quarter (27%) want to access their pension pot because they believe they can reinvest it more effectively on their own 

Typically just 25% of a pension pot can be accessed tax free, the remaining income is taxed at the individual’s marginal tax rate.

Comment on accessing pensions to put the money into saving accounts

Kate Smith, Regulatory Strategy Manager said: “It’s interesting that most people planning to take money from their pension want to keep it in other savings rather than spend it. Other savings products do have a role in retirement planning but there’s a risk that they’ll face an unexpected tax hit and also lose valuable product benefits and means tested benefits by moving outside a pension. Of course, what’s most important is understanding your options and planning how you’ll spread your hard earned savings to make the most of your retirement.”

Comment on understanding tax implications

Kate Smith, Regulatory Strategy Manager at Aegon UK said: “The pension flexibilities provide everyone with far greater choice over how they access their savings and these changes should encourage greater engagement with retirement planning. However, the changes present people with big decisions, and with that comes potential risk. It’s worrying that more than a third of over 55s aren’t aware of the tax implications of accessing their pension, as people could lose out on thousands of pounds of their hard-earned savings if they pay more to the taxman than they need to or are pushed into a higher tax bracket.

“Our research showed that once consumers were aware that taking their pension out as a lump sum could have financial repercussions, one in six would reconsider making this move.

Comment on taking time to understand your options

Kate Smith, Regulatory Strategy Manager at Aegon said: Today [April 6] marks the start of a new era of income flexibility, there’s no need to act immediately and we’d urge people to take time to consider their options and make sure they’ve understood the implications of each of them. If you don’t have an immediate plan to spend this money, you can leave it to grow tax free in your pension. There’s no rush. Remember, it’s available to you at any future point.  

“These figures highlight how people say they are intending to access their pensions, it’s only in the weeks and months to come that we’ll get a clear picture of what they are actually doing.”

“People need to understand their options and the pensions industry will help them to do this as will the government’s Pension Wise service.”

Aegon recently launched Your Retirement Planner, an online tool that can be used by customers and their advisers to explain the various income options and highlight the pros and cons of each – new window)