Urgent warning for thousands over surprise tax bills – check if you’re affected
MORE and more households are withdrawing large parts of their pension pots, potentially unaware that it could trigger a hefty tax bill.
Of the 705,666 pensions accessed for the first time in 2021/22, more than half were fully withdrawn, according to new research.
The number of pensions over £50,000 that were fully withdrawn rose by 15.5% from 15,296 to 17,661 from 2020/21 to 2021/22, analysis by financial advice firm NFU Mutual has found.
Over 260,000 of these full withdrawals were for smaller pots with less than £10,000 in them.
Overall, more than 10,000 of the withdrawals were taken without getting financial advice.
It's important to know that only 25% of withdrawals are tax-free, and the rest is added to your other taxable income.
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If you make large withdrawals, you may be hit with a 40% tax rate, or in some cases 45%, NFU Mutual added.
If your total income - including the taxable pension withdrawal - exceeds £100,000, you'll also start to lose your tax-free allowance.
The personal allowance is the amount you can earn tax-free every year.
In the current tax year - which runs from April 6, 2022, to April 5, 2023 - the figure is £12,570.
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Plus, if you continue to work after taking a taxable sum, the amount you and your employer can pay into a pension will be reduced by £4,000 each tax year.
To avoid a tax bill, you should consider phasing withdrawals over a number of years, if possible.
There are plenty of tax calculators to help you check pension withdrawals online, including one by .
Before making any big financial decisions, speak to a financial advisor.
As of this summer, millions above the age of 50 can now get free pension advice.
Sean McCann, chartered financial planner at NFU Mutual, said: "Some people 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.
"If investors are concerned about market volatility, talking to their pension provider about lower risk funds may help them avoid an unnecessary tax bill.
“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 can offer from inheritance tax.”
When can you access your pensions?
The earliest you can withdraw from a private and workplace pension without penalty is currently age 55.
However, this doesn't necessarily mean that you should, especially during periods of high inflation.
From 2028, the age you can start withdrawing cash will rise to 58.
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We've previously looked at pension auto-enrolment and how much you could save.
Meanwhile, the state pension age could rise to 68 for millions of people "as early as 2035".