Research suggests around 200,000 savers plan to cash in their defined contribution pension pot next year, creating a potential tax windfall for the Treasury of up to £1.6bn.
The poll of 1,247 UK adults, carried out by Ipsos Mori on behalf of Hargreaves Lansdown, found that 12 per cent of DC savers plan to take advantage of the Budget freedoms available from April.
Of those who plan to take the cash, only 38 per cent of people knew how much tax would be paid on medium-sized pension pots, while just 6 per cent could say how much a large pot would lose to tax.
Hargreaves Lansdown says based on the results there could be as many as 200,000 people choosing to cash in their savings next year. It estimates the Government’s tax take on this would be between £800m and £1.6bn.
The Government’s own estimate puts the extra tax income in 2015/16 at only £320m, rising to £600m in 2016/17.
Hargreaves Lansdown head of pensions research Tom McPhail says: “Whilst we support the basic principles behind the Government’s reforms, the speed and complexity of these changes mean that a lot of investors are going to paying unnecessarily large amounts of tax to the Government. The Chancellor has effectively engineered a tax windfall for the Government from unsuspecting pension investors.
“There is an urgent need for the Government to think again about how to effectively regulate these new freedoms. We want investors to take responsibility for and to engage with their savings but we also don’t want then paying unnecessary tax bills or running out of money.”
The survey also found only 22 per cent planned to use their pension to live on. Some 21 per cent would have a holiday, 16 per cent would reinvest in property and 13 per cent planned to pay off debts.