Don’t take money out of your pension pot until you have spoken to a financial adviser.

A new analysis of Financial Conduct Authority (FCA) data shows that thousands of people risk paying a significant tax bill when they make pension withdrawals and cash in their pension pot without first seeking advice.

The analysis by NFU Mutual found that more than 15,000 pension pots worth more than £50,000 were fully encashed in the 2020/21 tax year.

61.3% of these pension pots were fully withdrawn without the benefit of financial advice, up from 58.9% the year before.

And of the 2,777 pension pots worth more than £100,000 fully withdrawn, six in ten were cashed in without any advice.

If you withdraw all of the money from your pension pot, you can end up paying income tax at 40% or 45% on part of the withdrawal and lose protection from inheritance tax.

Sean McCann, Chartered Financial Planner at NFU Mutual, said:

“Those cashing in large pension funds not only risk a large income tax bill, they also lose the favourable tax treatment on any future growth as well as exposing the money to a potential inheritance tax charge.

“Some cash in their pension funds without a clear idea of what they plan to do with the money, often putting it into a bank account.

“Although it sounds counter-intuitive, for those that can afford to, pensions should be the last investment they access in retirement, because of the protection they offer from inheritance tax.

“It’s concerning that more people are fully cashing in large pension pots without taking advice first. If investors are concerned about market volatility, talking to their pension provider about lower risk funds may help them avoid an unnecessary tax bill.”

Read what questions should you be asking before you access your pension?

More than 1,600 cashed in their pension pot worth over £100,000 without first taking financial advice, which means they could face an even more significant tax issue.

When your total taxable income, including pension withdrawals, exceeds £100,000 in a tax year, you start losing your income tax personal allowance.

Losing your personal allowance means the first £12,570 of your taxable income is also subject to income tax, leading to a very high marginal tax rate.

For any flexible withdrawal from a pension pot including taxable income (but not the tax-free pension commencement lump sum), your annual allowance for tax-privileged pension contributions in the future is automatically reduced, for life, from £40,000 to £4,000.

This reduced annual allowance can severely restrict your ability to rebuild your pension pot if, for example, you return to work in later life.

Read about the reforms the Association of British Insurers are urging