LONDON: About 200,000 people plan to cash in their entire pension pot in 2015, according to a MORI poll.Under the new legislation, workers will be able to use their pensions “like bank accounts”. But there is growing concern that many who choose this route could be stung by a substantial tax bill.
Financial experts now advise that workers avoid such a bill by taking out the cash over several years rather than grabbing all the cash in a lump sum, leaving themselves open to a large liability.
Tax experts said workers should recognise that money taken from pensions would be added to their taxable income.
About 25 per cent of the money withdrawn from a pension can be taken as a tax-free lump sum.The rest will be taxed accordingly.
This means that for a worker who earns £30,000 a year, with a marginal tax rate of 20 per cent, cashing in a pension pot worth £90,000 will raise the annual taxable income to £97,500.
This is well over the 40 per cent tax threshold of £41,865, resulting in a hefty tax bill.Experts said such “eye-watering” bills could be avoided by drawing smaller amounts from a pension pot over a number of years.
