383,000 pension savers flexibly withdraw £2.6bn in Q1 2021

A record 383,000 people withdrew money flexibly from their pensions in the first three months of 2021, representing a 10 per cent year-on-year and 6 per cent quarter-on-quarter increase, HMRC has revealed.

The average amount withdrawn was £6,900, up slightly from the record low of £6,820 in Q4 2020 but 4 per cent below the average amount in Q1 2020, resulting in flexible withdrawals totalling £2.6bn.

The £2.6bn withdrawn was a 6 per cent increase in comparison to Q1 2020.

The total value of flexible withdrawals since pension freedoms was introduced in 2015 has now exceeded £45bn.

Alongside its flexible pension payment statistics, HMRC published its Pension schemes newsletter, which revealed that HMRC repaid £23,183,421 in tax on flexible withdrawals in Q1 2021.

This brings the total value of reclaimed emergency pension tax on flexible withdrawals since the introduction of pension freedoms to £716m.

“For most people the tax system is fiendishly complicated so it comes as no surprise £716m has been repaid to people in over-paid emergency tax since 2015,” commented Canada Life technical director, Andrew Tully.

“The pension tax system was never adapted to the way people are using the flexibility of the pension freedoms so have to complete one of three separate forms to reclaim tax.”

Commenting on the flexible payment statistics, Hargreaves Lansdown senior analyst, Nathan Long, said: “Calmer and more positive markets at the start of this year encouraged more pension savers to dip into their pots.

“The pandemic had sent jitters through the markets during 2020, spooking some retirees, who put the brakes on their pension payments, so the average withdrawn hit record lows.

“In early 2021, despite the market recovery, they were still wary of taking too much. The average was higher than at any other stage since the onset of the pandemic, but down 4 per cent in a year and low by historic standards.”

Barnett Waddingham partner and head of DC, Mark Futcher, added: “The ‘dash for cash’ that pension freedoms now allows continues, as more people are dipping into their pension pot.

“It’s not unexpected that there’s a rise in the number of people who have a genuine need for cash, due to the financial impact of furlough or job loss during Covid-19, although we have not seen an uptick in general member engagement with their pensions over the last year.

“But we must ensure that if people are taking cash from their pensions, it’s because they have no other choice, or they are aware of the impact this could have on their later life. Pension scheme providers need to do more to help members understand that pensions are safe and secure and are designed to provide an income after work.”

The second quarter of 2021 will “almost certainly” see a “sharp increase” in flexible withdrawals, according to AJ Bell senior analyst, Tom Selby, due to savers being likely to take advantage of a new set of tax allowances.

He continued: “Anyone accessing taxable income from their pension needs to be aware of the impact of the money purchase annual allowance (MPAA), which reduces the amount you can save in a pension each year from £40,000 to just £4,000.
 
“This draconian cut will leave many who have accessed their pension during a time of extreme financial distress – either for themselves or loved ones – severely hampered in their ability to rebuild their retirement pot post-lockdown.
 
“At the very least the MPAA needs to be increased back to £10,000, but if the government really wants to send a pro-saving message it should scrap the MPAA altogether.”

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