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Tax And Benefit Shock For Unlocked Pensions

One in eight of those raiding their retirement savings under new pension freedoms were caught out by unexpected taxes and lower benefits, new figures show.

The report by Citizens Advice found the rule changes have been popular but that some of those drawing down cash are unaware of the consequences.

It found 12% saw an impact to taxes or benefits.

Figures earlier this year showed 232,000 people had used the new freedoms to access £4.3bn from their pension pots in the first year of the reforms.

People can usually draw down 25% of the sum free of tax while the rest is taxable, according to official advice service Pension Wise.

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But the tax-free amount cannot be paid out all in one lump sum.

Taking the money in smaller chunks still means three-quarters of each chunk is taxable.

The effect on means-tested benefits such as housing benefit and pension benefit is more complex.

It depends on factors such as a person's income and how much they have saved up.

The Citizens Advice report was based on a survey of 500 people who had accessed their pensions since the freedoms were introduced.

Tax problems were more common with those taking out their whole pot.

Unexpected benefits issues were more likely when people had lower pensions savings.

The charity's chief executive, Gillian Guy, said: "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 (Munich: SOQ.MU - news) called for the Government and pension providers to help ensure that people were fully informed about the complicated choices they faced.

Earlier this week, Citizens Advice said 60% of those who had raided their retirement savings had no plan for how to pay for future care.