The majority of people accessing their pensions flexibly by drawing cash while still paying in are unaware of the tax implications and the money purchase annual allowance (MPAA), new research has found.
Of the 37% of people accessing pensions flexibly while still working, more than two-thirds (67%) are unaware of the MPAA, Retirement Advantage claimed.
Pensions technical director Andrew Tully (pictured) said he was concerned many people would be losing out following the MPAA rule change. "This is likely to catch many out when the limit drops to £4,000 from 6 April this year," he said.
Chancellor Philip Hammond announced in his 2016 Autumn Statement, that he would cut the MPAA by 60% to £4,000 per year in April "to prevent inappropriate double tax relief". The government confirmed the controversial move in March, arguing it would affect merely 3% of savers over the age of 55.
HMRC's latest pension freedom statistics showed more than 500,000 people have withdrawn a total of £9.2bn from their pensions using the flexible rules since April 2015, with an average of three payments per person.
Pension cash in savings accounts
Retirement Advantage had polled 250 people aged 55+ and found more than a quarter (28%) of them had used their pension funds for home improvements, while a further one-fifth (19%) spent the money on holidays.
Worryingly, more than a quarter (26%) of those polled had put the money into a savings account, where interest rates are at record lows, Retirement Advantage found. A further fifth (19%) invested the money elsewhere.
Tully said: "I doubt many Lamborghinis have been bought with the cash, but taking money out of a tax efficient pension to simply reinvest or put in a savings account, having paid tax on some or all of it, is a little mad.
"Pension freedoms are clearly proving popular with retirees, but there are pitfalls for the unwary. With freedom and choice comes added complexity and a picture is emerging of fewer people receiving advice."
Last year, research from Citizens Advice already suggested a third (32%) of those with pensions of more than £100,000 were transferring their pensions into bank accounts.
Royal London director of policy Steve Webb said at the time: "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 you are missing out on the returns you could get if you left your pot invested."
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