Union Jack Piggy Bank
Hargreaves Lansdown estimated the Treasury will generate a tax windfall of up to £1.6bn Reuters

Up to 200,000 pension investors are set to cash in their retirement savings next year, landing the Treasury with a tax windfall of up to £1.6bn, according to a poll by Ipsos Mori for Hargreaves Lansdown.

The survey, which questioned 1,247 people, comes after Chancellor George Osborne unveiled a raft of pension freedom reforms in his 2014 Budget.

The legislation means that, among other things, defined contribution (DC) pension (roughly based on how much an employee pays into a pot) investors over the age of 55 will be able to take their pension out as a lump sum from April 2015, rather than paying for an annuity.

The study found more than one in ten (12%) respondents with a DC pension said they will take advantage of the new freedoms and withdraw all of their pension in one go.

But the research also revealed only two in five (38%) can accurately state how much tax would be deducted from a medium-sized pension pot – the proportion who can accurately predict what rate of tax would be applied to large pension pots falls to less than one in ten (6%).

'Whilst we support the basic principles behind the government's reforms, the speed and complexity of these changes mean that a lot of investors are going to paying unnecessarily large amounts of tax to the government," said Tom McPhail, head of pensions research at Hargreaves Lansdown.

"The chancellor has effectively engineered a tax windfall for the government from unsuspecting pension investors.

"There is an urgent need for the government to think again about how to effectively regulate these new freedoms."

Hargreaves Lansdown also estimated the Treasury will generate a tax windfall of up to £1.6bn ($2.5bn, €2bn) from the move.

By next April, there are likely to be as many as 200,000 retired pension investors waiting to get at their retirement savings.

"With around 7.5 million people aged between 55 and 64 and half of households owning a defined contribution pension, even based on conservative estimates, we expect as many as 200,000 people to cash in their pension pots entirely next year," McPhail explained.

"Based on the median pension pot value of £29,000, the tax generated for the Treasury will be between £800m and £1.6bn, depending on the rate of tax the individuals are actually liable for [the lower estimate is based on a 15% tax rate, the higher estimate on a 30% tax charge]."

The Treasury had not responded to a request for comment at the time of publication.