Pension freedoms bring unexpected tax or welfare losses

Tax issues

A Citizens Advice survey of 500 adults who have accessed their pension since the freedoms came into force in April 2015 showed that one in 10 had unforeseen tax problems such as deductions as a result. That proportion rose to 30% for those who took their whole pension pot in one go.

Out of those with pension pots worth less than £20,000, 11% experienced benefit problems such as reductions in welfare payments or losing their eligibility to claim benefits.


The survey also showed that 29% of consumers have opted to put their pension savings into a bank account, while another 29% have spent it on daily living costs.

One in five plan to spend their pensions on luxury goods while 16% plan to pay off debt. Only 18% plan to invest their money.

Care cost burden

Worryingly, the research shows that more than three in five (61%) don't know how they would fund their care costs, despite the fact that around half of older adults have care needs.

Gillian Guy, chief executive of Citizens Advice, says: “In a minority of cases people are being caught out by unexpected consequences of using the pension freedoms, such as being hit by tax deductions or a cut to their benefits.”

She argues that as people's pension choices become more complicated, government and providers need to continue their work to promote free Pension Wise guidance, to ensure that people are fully informed about their options in retirement.


“Care costs can be a heavy financial burden that many people are unprepared for. It is unsurprising that many people in their 50s are not thinking about how they will pay for care costs, when the need for this could be 10, 20 or even 30 years away.

“But this issue does need some attention, otherwise people risk dipping into their pension now and find they need some of the money later.”

Steve Webb, director of policy at Royal London, says: “As this report shows, the big risk to the success of the pension freedoms is not pension money being spent on Lamborghinis; it is pension cash being moved into bank accounts and left to dwindle.”

If pension savers are putting their money into a bank account on a temporary basis before reinvesting it, says Webb, then there is less to worry about. But if they leave their money in an account paying little or no interest, they will see its real value decline through inflation.

“It is vital that anyone considering taking their money out of their pension pot has access to high-quality advice and guidance, which stresses the option of leaving the money invested.

“Consumers need to be made aware that putting your cash in an account paying very little interest is not a safe option and will mean that you are missing out on the returns you could get if you left your pot invested.”

This story was originally written for our sister magazine, Money Observer.

More about