George Osborne’s pensions revolution: Withdrawing cash early is big risk

The insurance industry and business groups have issued a stark warning following the government’s most recent pensions announcement, claiming that withdrawing cash from pension pots too early could store up huge financial risks for the UK for years to come.

Yesterday chancellor George Osborne hailed the next stage in his pensions revolution with news that savers could now use their pots like bank accounts, withdrawing any sum up to a total 25 per cent tax free.

Announcing the plans, Osborne said: “People who have worked and saved all their lives will be able to access as much or as little of their defined contribution pension as they want from next year and pass on their hard-earned pensions to their families tax free.”

But industry bodies are issuing caution, amid concern that savers could choose to withdraw small sums from their pension, sapping out 25 per cent of the value and leaving them short for the years to come.

Otto Thoresen, director general of the Association of British Insurers, said: “The impact of people rushing to take pension fund money at 55 needs to be thought through if we are all not to have to live with the consequences for a long time.”

30-second guide to pension changes

Q and A

Q What’s happening? I woke up and pensions are all over the TV again

A The Taxation of Pensions Bill was published yesterday by the government setting out formally the pension changes unveiled in March.

Q Back in March? What was new yesterday then?

A Some of the bigger rules were only mooted in a draft bill published earlier this year, but yesterday the government confirmed they would be included in the new laws.

Q What are these “bigger rules” that you mention?

A Savers will be now able to access all their defined contribution cash, either in one go, in smaller amounts over time (such as a bank account) or use it to buy a fund product such as an annuity or drawdown fund.

Q So can I use my pension pot like a bank account then?

A Sort of – savers can now take out as much cash from their pension as they want, and as frequently as they want.

Q Great. What’s the catch? I hear tax is a big factor in this change.

A Currently, you can take a tax free lump sum of 25 per cent with the other 75 per cent incurring tax. If you have £40,000 you get £10,000 tax free and pay tax on £30,000.

Q That’s one option but what happens if I take my £40,000 in instalments?

A You will pay income tax on 75 per cent of each withdrawal. If you take £5,000 a year for eight years, you’ll get a lump sum of £1,250 tax free and pay income tax on the other £3,750 a year That’s below the £10,000 allowance so you may end up paying no tax.