Around 200,000 people will take advantage of the Government’s plan to reduce the rate of tax paid on the withdrawal of a whole pension pot and use this money on holidays and property.

The Government shake-up will mean that from April 2015, people aged over 55 will be able to withdraw their entire pension fund and only have to pay their marginal rate of income tax in that year, rather than the current situation where they are charged 55% tax if they withdraw the whole pot.

Of those planning to cash out their pensions, 16% plan to invest their money in property and 12% will use it on DIY.

Cameron Ewer, Head of Strutt & Parker in Cambridge said: “History has shown property to be a stable investment over the years. When investing in a Buy-to-Let property, the return can be almost immediate and provide a stable income, and that’s before potential capital growth even comes into play.

"Ultimately, property is one of the best ways of future proofing and we expect to see a number of pensioners investing in their current homes and expanding their property portfolios in light of these new announcements.”

Taking the money

More than one in 10 (12%) investors with a defined contribution pension, whereby you build up a pot of money that you use to provide an income in retirement, say they will take all of the money in one go.

Research commissioned by financial services firm Hargreaves Lansdown found that only a fifth (22%) of those planning to take advantage of the new measures intend to use it to live on.

One in five (21%) have earmarked the cash to pay for a holiday and 13% will use it to pay off debts.

Windfall

Hargreaves Lansdown said the study indicates that the Treasury stands to receive a tax windfall of up to £1.6 billion because of the changes, as people cash in their pension savings early.

However, the report found that only two in five investors planning to cash in can accurately state how much tax would actually be deducted from a medium-sized pot, while the proportion falls to just 6% for those with large pots.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said that the speed and complexity of the changes mean that a lot of investors are going to be paying unnecessarily large amounts of tax to the Government.

He said there is an urgent need for the Government to think again about how to effectively regulate these new freedoms.

When the proposals were first set out in the Budget, Pensions Minister Steve Webb said he was "relaxed" about the possibility of people blowing their savings on a Lamborghini sports car.

The research was carried out in September and October, using a base of 1,247 adults in the UK aged between 45 and 65.

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