Pensions warning as 48% make potentially costly move | Personal Finance | Finance
Brits have been issued advice about their pension pots (Image: Getty)
British retirees have been issued a pensions warning, as many make a potentially costly move. Data suggests that 48% of all direct contribution pension pots first accessed in 2024-2025 were cashed as a complete lump sum, but this can leave retirees out of pocket in their later years, an expert has said. Antonia Medlicott, Founder and Managing Director of financial education specialists Investing Insiders, said: “Whether or not cashing out your pension is the right move varies dramatically depending on personal circumstances. For smaller pots, where you have other sources of income for retirement, cashing them out can often be the simplest and quickest approach.
“With pots that have much higher values, that’s when things start to get more complicated. In these situations, cashing them out isn’t often the best decision for your money. Instead, you should be thinking about how you can withdraw the money in the most tax-efficient way possible, whilst ensuring that you’re set up for the rest of your retirement.
Pensioners could be left out of pocket, an expert suggests (Image: Getty)
Ms Medlicott proposed two scenarios, using a £100,000 pension pot and the full state pension of £12,548 a year, topped up with roughly £7,358 a year from personal savings, to provide an annual income of around £20,000.
She said: “In the first scenario, you take the full £100,000 from your pension in a single tax year. You can take the first 25% tax-free, leaving you with £75,000 in taxable income. However, with the State Pension using up nearly all of your £12,570 personal allowance, the entire £75,000 withdrawal is hit by tax. You pay 20% on the first £37,700 of it and 40% on the remaining £37,278, leaving you with a total upfront tax bill of £22,451 paid on the first day of your retirement.
“The remaining £77,549 can be invested in £20,000 increments into an ISA each year, which, with a 4% growth rate, will last for 14 years if you withdraw the yearly £7,358 top-up.”
The expert added: “For the second scenario, you leave your £100,000 in your pension and use phased drawdown. Here, each withdrawal is 25% tax-free and 75% taxable, which, with a withdrawal of £7,358, means £5,519 of taxable income. After the State Pension, almost all of that £5,519 is taxed at 20%, equalling a total annual tax bill of £1,099. Done this way, the pension will last a full 20 years, with the total tax over this period being £21,987.
“When it comes to the total tax paid, option A both pays slightly more tax and runs out 6 years earlier, making it a much harder sell. On top of that, the £22,451 that you have to pay in tax on day one would’ve turned into £49,193 if it had stayed invested in a 4% growth pension, showcasing the real cost of cashing out. It’s not just the initial hit, but losing out on what that money could’ve become.”
Financial advisor Ian Dempsey said: “One thing that catches a lot of people out is that some schemes pay out the 25% tax-free cash, and it’s then partially taxed (as if it were the salary for that month), then the individual claims it back.
“If they’re still working, their tax codes go all over the place, and it’s not quite the dream they expected! I’ve heard plenty of people who don’t even know they can claim it back.”
