The tax downsides of the new pension freedoms allowing Britons to withdraw £15m a day

BRITONS have seized on their new pension freedoms to withdraw an incredible £15 million from their pots every single day, but fears remain that the bonanza could backfire.

Pension freedom reforms introduced in April 2015 finally gave the over-55s full control of their pots and liberated them from the obligation to buy a poor value annuity.

However, sceptics continue to warn that savers could splurge money designed to last for the rest of their lives or be swindled by fraudsters and consequently end up spending their final years in poverty. 

There are tax traps as well because complying with the rules is complicated. 

Before you cry freedom, make sure you understand the risks. 


Pension freedom reforms introduced in 2015 gave the over-55s full control of their pension pots

Effectively, you will be taxed as if you took that lump sum every month for the entire year, which means you could end up paying far too much

Andrew Tully


Pension withdrawals are added to your total income from all sources for the tax year and are subject to income tax. 

The latest worry is that, because of a quirk in the tax system, many people are paying too much to HM Revenue & Customs (HMRC) after making a one-off withdrawal, in some cases as much as £15,000 more. 

Andrew Tully, pensions technical director at Retirement Advantage, says if you withdraw a single lump sum your pension company is likely to use the emergency tax code to calculate how much you owe. 

“Effectively, you will be taxed as if you took that lump sum every month for the entire year, which means you could end up paying far too much,” he says. 


Quirks in the tax system mean that many people are paying too much tax to HMRC

Someone who takes £10,000 and has no other income should pay zero tax because this withdrawal falls below the tax-free personal allowance, currently £11,500. 

“However, they could end up paying more than £3,000 at an effective tax rate of around 30 per cent,” Tully says. 

He calculates that HMRC knowingly pockets an extra £100 million a year as a result: “You will get this money back in the end, but have to wait for the taxman to adjust your tax code and issue a rebate.” 

Alternatively, if you do not plan to make any more withdrawals this year, you could claim a refund direct from HMRC. 

Tully adds: “Search for claim forms P50Z, P53Z and P55 on government website to see which applies in your particular case.” 

He says that another option is to take a small initial pension withdrawal first, say £100, wait for HMRC to issue the relevant tax code, then draw a larger sum.

Tax is complicated and can catch out the unwary. 

He adds: “The onus is on you to understand the implications of any ad hoc pension withdrawals and how much tax is due.” 

Online calculators such as at can help you work out the amount of tax owed. 


The HMRC knowingly pockets an extra £100m a year as a result of over-payment


The biggest tax danger is that a large pension withdrawal could lift you into a higher tax bracket, which could see a basic rate taxpayer pay tax at 40 or even 45 per cent on some of the money they withdraw. 

Chase de Vere certified financial planner Patrick Connolly says someone who is usually a non-taxpayer but accesses their pension for the first time and withdraws £200,000 in one go, might get only £146,700, with the remaining £53,300 lost in tax: “Somebody who pays tax on other earnings could see their £200,000 depleted to just £132,500.” 

You can reduce the risk by making regular, smaller withdrawals, but should consider taking independent financial advice first. 

Connolly warns that if you move money out of a pension wrapper you also sacrifice valuable income tax and inheritance tax (IHT) benefits: “If you put the money into, say, a savings account, your interest would be subject to income tax and any remaining capital may be liable to IHT when you die.” 

Another worry is that many people are giving up the safety of an annuity, which guarantees an income for life, and keeping their pension funds invested in the stock market through income drawdown. 

“If stock markets crash, many could outlive their money,” Connolly adds. 


Despite the dangers, the number of people making pension withdrawals jumped 25 per cent to 198,000 in the three months to October with the amount taken out totalling £1.59 billion, an average of about £8,000 each.

Broker A J Bell’s research shows that almost half the people using the pension freedoms are worried about running out of money. 

Senior analyst Tom Selby says they need to be cautious: “Savers will struggle to achieve peace of mind unless they engage in the process, understand the risks and build a sustainable retirement income plan. Many appear not to be doing so and this could have serious repercussions further down the line.” 

Alistair McQueen, head of savings and retirement at Aviva, says pension freedoms are welcome and savers should be trusted with their money: “However, our data suggests that around 70 per cent are taking money without the help of financial advisers or even contacting the Government’s free Pension Wise service.” 

Separate figures from the Financial Conduct Authority show that on average people take just half a day to consider their options. 

McQueen adds: “The danger is that you will risk 40 years of savings in a few hours. Do not act in haste and repent at leisure.”