Triggering pensions freedoms without a plan could be costing you money

According to recent research, the introduction of pension freedoms has led to many thousands of people taking out large sums from their retirement funds, then leaving it earning them next to nothing in low-interest accounts. The figures from Citizens Advice who carried out the study suggest that around three in ten people are currently doing this, with the move appearing to be just as common amongst those with smaller pensions as those with pots valued at over £100,000.

As well as impacting upon the returns seen from their savings, these people could also be inadvertently losing a chunk of their pension through taxation. Only 25% of a person’s pension fund can be withdrawn without incurring tax, with anything more than that taxed in the same way as income. Particularly large withdrawals could therefore result in a sizeable tax bill, as well as potentially pushing those paying basic rates of tax into the higher-rate bracket.

Other perks that may be lost through withdrawing pension funds include capital gains, which are tax-free within pensions, and protecting retirement savings from inheritance tax. If the money is moved into a current account, it becomes part of an individual’s estate and therefore will possibly incur death duties.