Royal London has called for refinements to the retirement risk warning system because of concerns that many people using the pension freedoms are suffering financial detriment.
Fiona Tait, pensions specialist at Royal London, said recent research on a sample of 800 of the mutual’s customers who had taken advantage of the freedoms found 69 per cent had chosen to take all of their pension pot as a cash lump sum.
She said that, in most cases, 75 per cent of the cash sum those customers received was subject to an income tax charge.
Ms Tait said: “The research indicates that around a third of people who are withdrawing cash do not appreciate that their options could include a switch to a similar investment fund within their existing pension plan without paying the tax charge for full encashment or switch to an alternative provider which allows partial encashment.
“Customers aged over 55 would still have access to their savings whenever they need it and withdrawing money over time is likely to be much more tax efficient.
“Now we have these findings, Royal London is looking to update the questions we ask in order to check future customers’ understanding of the implications.”
Ms Tait said the insurer was “extremely concerned” that the findings among its own customers migh reflect a wider industry trend.
Of those surveyed, 16 per cent said they intended to use the cash to clear their mortgage or other debts.
But 32 per cent intended to withdraw their money in order to place it all in an alternative savings or investment vehicle.
Of those questioned, 23 per cent intended to leave their money in cash within a bank, building society or cash ISA account which may pay a lower rate of return than their pension.
Last week Royal London released its results for the first half of 2015 which showed how much the business has benefitted from the introduction of pension freedoms.
Sales of personal pensions were 56 per cent ahead on the first half of last year at £947m.
The Ascentric wrap platform saw gross sales of £1.19bn with strong growth in the retirement market, particularly a 115 per cent increase in customers transferring into drawdown.
Adviser view
Aron Gunningham, a financial adviser with East Sussex-based Absolute Financial Management, said: “I have not seen anywhere near as high a prevalence of people taking all their pension pot as a cash lump sum.
“I assume these people didn’t have an adviser and were probably acting off their own bat.”
