People planning to retire in 2017 could be risking unexpected tax bills by withdrawing more than the tax-free lump sum.

Prudential has released new research that shows one in five people (19%) could be impacted if they withdraw more than the allowance that savers can take from their pensions at retirement.

Under the pension freedom reforms, most pension savers over the age of 55 are entitled to take some or all their pension savings in the form of a cash lump sum, and the first 25% is tax free.

However, Prudential's Class of 2017 study, found that 19% of those retiring, are planning to withdraw more than the 25 per cent tax-free limit from their pension, which could leave them with a one-off tax bill, or having to pay tax at a higher rate than they normally do.

Stan Russell, retirement income expert at Prudential, said: "Being able to withdraw lump sums from their pension pots gives savers unparalleled flexibility on how to spend their money, and it is clear that people retiring this year are making full use of this benefit.

"Many of the Class of 2017 are withdrawing money to sort out their finances for retirement, with many paying off mortgages and debts, as well as helping out family and enjoying themselves."

"However, it is also clear that without careful planning, the tax man could benefit from people making the most of the newly acquired access to their pension funds."

Prudential's research into the financial plans and aspirations of people planning to retire in the year ahead – now in its tenth year – found that more than two in five people planning to retire in 2017 (44 per cent) are planning to withdraw some cash from their pension savings.

A quarter of retirees will stay within the 25 per cent tax-free lump sum limit.

At the same time, Financial Conduct Authority data shows that fewer than half (47%) of those who withdrew all the money from their pension savings between July and September 2016 sought professional financial advice before doing so.

However, the proportion seeking advice had increased from just 29 per cent at the start of 2016.

Meanwhile, Treasury data released as part of the Spring Budget shows that the amount of cash being taken from pension funds is higher than expected when the freedoms were first announced.

It was initially estimated that the changes would mean a total of £900million of extra tax being paid in the tax years 2015-16 and 2016-17. In fact, a total of £2.6 billion in extra tax is now expected to be paid in the two years to 6 April 2017.

"For many people approaching retirement and considering how to make the most of their savings, a consultation with a professional financial adviser where appropriate could help to ensure they access their pension in a way that benefits their long and short-term aims," Russell said.

First published 13.04.2017

Lindsay.sharman@wilmingtonplc.com