Do your sums before tapping your pension

"Criminals set to pounce after reform of pension rules," said a headline in the FT last week. Since the huge reforms to pensions were announced, savers "are nearly three times as likely to be contacted by pensions scammers". Pre-budget, 15% of people surveyed said they had been approached by "firms offering to help them access their pension". Post-budget, that number is up to 42%.

But as one of the readers who forwarded this story to me pointed out, the first reaction of an average pension holder is to ask "which scammers"? The ones who have failed to educate people about their open-market annuity options, or perhaps the ones who have kept their savers in overpriced default funds for decades? Rip-offs abound wherever you look in the pensions industry.

However, there is one statistic on the pensions changes that is encouraging. Some 50% of pension schemes say that they have not yet decided whether to allow their savers to use the new pension freedoms. You might think that sounds like further villainy. But given how little people understand about the new system it might be no bad thing.

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Recent surveys suggest that some 200,000 people intend to cash in their pension pot in full the second they can, with one in five of those splashing out on a holiday with the loot. Anecdotally, almost none of these people understand the tax consequences of doing so. The key to grasping this is to realise that anything you take out of your pension is treated as income in the tax year in which it is taken.

So, to use numbers from The Daily Telegraph, say you have an income of £30,000 and you decide to withdraw £90,000 of pension money. You have a marginal rate of 20% on the £30,000, £22,500 comes tax free (everyone gets one quarter of their pot tax free) and the rest is taxed at your marginal rate of income tax. You pay 20% on the income up to £41,865 and then 40% on the rest. Your total bill on the pension? £24,543, a number that could've been halved simply by taking the money in smaller annual sums so as to stay under the higher-rate band. If you're already a higher-rate taxpayer, you'll be paying 40% on all the excess over the 25% you get tax free.

This is not something most people looking forward to pensions freedom are anticipating. So earlier this week, the regulator, the FCA, announced it will require pension providers to provide a "second line of defence" to those who ask to use their pensions freedoms, checking they fully understand what they are doing. If that happens, it is hard to see how 200,000 people would decide to take their money as one heavily taxed lump sum.