More than a quarter of Britons don’t realise they will have to pay tax on their pension pot if they opt to take all the money as cash.
That is the finding from a new Legal & General survey of more than 2,000 over-55s, which found 27 per cent thought their pension withdrawals would be tax free.
The group’s research - entitled the Price of Freedom - found 21 per cent of over-55s would be "shocked" to find they faced a tax bill.
"Many customers don’t know about some of the fundamental factors that can impact how much money we have in retirement. Tax is one of these," said Emma Byron, managing director of Legal & General Retail Retirement Income.
She added: "None of us spend as much time as we should thinking about pensions and retirement planning. But leaving important decisions about later life to the last minute could potentially leave you poorer in retirement. It might even put the hard-earned pension pot you’ve built up during your working life at risk."
Of those planning to access some of their pension pot tax free, 37 per cent did not recognise the 25 per cent threshold that is currently without tax charge.
Andrew Pennie, head of Pathways at Intelligent Pensions, said he was surprised people did not seem to be aware of the tax implications of taking cash from their pension pot.
He said: "Tax is one of those things that has a lot of complex rules and it is very often misunderstood. But a lot of people are misguidedly cashing in pensions and paying a lot more tax than they thought they would."
He added: "All cashflow modelling should be done on net income. To be able to see your future, cashflow modelling is quite an effective tool to use. One of the things that a lot of people make mistakes with, and we challenge our clients on this, is when it comes to taking benefits.
"Some have this notion they are going to take 25 per cent tax-free cash, even if they don’t need it. We explain that, in some circumstances, it is more tax-effective to draw that out over a number of years. It is important to take the right advice before taking action."
