In addition, 33% of those aged 55 and over are not confident in their understanding of how pension withdrawals are taxed, with only 29% feeling confident.
The research comes as the Government and Financial Conduct Authority (FCA) conclude their consultation on a potential solution to the lack of support on offer for those who don’t have access to a financial adviser, and instead rely on generic information and guidance about their retirement savings. The proposed ‘targeted support’ approach would allow pension providers to explain what people in similar positions typically do when faced with a similar set of circumstances.
Mike Ambery, Retirement Savings Director at Standard Life, part of Phoenix Group said: “It’s concerning that nearly ten years after people with a Defined Contribution (DC) pension were given more choice in how to access their money as part of ‘pension freedoms’, so many people feel confused about their options. Providers have a big role to play in making communications as clear and targeted as possible, and greater access to personalised guidance is key. We want to be able to help people make good decisions and if implemented properly the targeted support solution could help us steer people towards the right outcomes for them.
“Many people understandably don’t think about how much tax they’ll need to pay from their pension income, however it’s important to bear in mind especially when it comes to the critical moment of accessing pension savings. Withdrawals are a complex area and if you are unable to access financial advice, it’s worth using the government’s free Pension Wise guidance service or speaking to your provider for the more complex questions.
“There can be a big cost to not considering tax when you access your pension. Standard Life analysis of FCA data found that more than 221 people fully withdrew a pension pot of £250,000 or more between October 2022 and March 2023, resulting in a tax bill of at least £97,500.”
Catherine Sermon, Head of Public Engagement and Campaigns at Phoenix Insights adds: “At retirement age many people are faced with complex decisions on how to use their pension savings despite often having very little knowledge or support. Without paying for professional financial advice, the twin issue of high-stakes decision-making and a lack of understanding leaves people at risk of choosing a retirement strategy that might not be in their best interest.
“Enabling firms to offer more tailored support so customers are better informed at this key juncture could be a significant factor to closing the gap between professional advice and free generic guidance services. Phoenix Insights has recently launched a public engagement programme which explores a range of perspectives on targeted support, along with the concepts of consumer choice, consumer protection and consumer best interest in accessing a defined contribution (DC) pension.”
Mike answers key questions about withdrawing money from your pension and how its taxed:
How can I access my pension pot? “You have several options for how to access the money in your pension pot:
• Take some or all of your pension pot as a cash lump sum – beware of that tax charges might apply to significantly reduce the money you receive
• Buy an annuity - an annual income that will be paid to you for the rest of your life. There are many types of annuity available to buy - you should shop around to find the best one that suits you. It’s possible to use part of your pension to buy an annuity, securing a level of income, and leave the rest to access flexibly
• Take money directly from the pension fund, and leave the rest invested (income drawdown)
• A mix of these options
What are the tax implications of each option?
“You can take your whole pension pot as cash straight away if you want to, no matter what size it is. If you do this, 25% of your total pension pot will be tax-free. You'll pay tax on the rest as if it were income. You can also take smaller sums as cash whenever you need to, and 25% of each sum will be tax free. Any taxable money you take from your pension will be added to your other income for that year and taxed at the relevant income tax band. It’s important to be aware that this may take you into a higher tax bracket than normal. When you take a flexible income (drawdown) or an annuity income, how much tax you pay depends on your tax band like other taxable income – for example in England any pension income beyond your tax-free cash between £12,570 and £50,271 will usually be taxed at 20%. If you choose drawdown, you can set up a regular income, which you can start, stop, or change whenever you want. You can also make one-off withdrawals. By comparison an annuity provides a regular income that will only vary if you’ve chosen options like inflation protection.
Do I pay tax on my state pension?
“Your state pension is taxable, but tax won’t be taken from your state pension itself and will normally be taken from any other sources of income that, together with the state pension, take you above the personal allowance - the income on which you don’t pay tax. The full new state pension is just over £11,500 in the current tax year, which is less than the standard personal allowance of £12,570. So, this won’t be taxed, but it does count as part of your total annual income. The state pension will rise by 4.1%, to £11,975 per year, from 1st April 2025.”
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