Flexible pension withdrawals total £2.3bn in Q3; HMRC repays £39.4m in overpaid tax

A total of £2.3bn was withdrawn from pensions flexibly in Q3 2020, bringing the total value of flexible withdrawals since the introduction of pensions freedoms in 2015 to over £37bn, according to HMRC.

The £2.3bn withdrawn represents a 2 per cent year-on-year decrease in comparison to Q3 2019, but remained on par with the total observed in Q2 2020.

Around 347,000 individuals took flexible withdrawals from their pensions in Q3 2020, a 6 per cent year-on-year increase and a 2 per cent rise in comparison to Q2 2020.

HMRC noted that the quarter-on-quarter increase was contrary to seasonal patterns, which “may be attributable” to the impact of the Covid-19 pandemic.

The average amount withdrawn in Q3 2020 was £6,700, a 7 per cent fall from the same months in 2019.

During the July, August and September, HMRC repaid a total of £39.4m to people who overpaid tax when flexibly accessing their pensions.

“The pension freedoms have been with us for several years now and it is absurd that this overly complex system remains in place,” commented Royal London pension specialist, Helen Morrissey.

“HMRC overtaxes people who then need to fill out any one of three different forms to reclaim this money back. In the last quarter we saw a rise in the number of people looking to access their pensions flexibly - this may well be due to the current Covid-19 pandemic.

“The last thing they need at such a difficult time is to be over-taxed and then have to reclaim it - it is a system in urgent need of reform.”

Commenting on the flexible withdrawal figures, Canada Life technical director, Andrew Tully, said the £37bn withdrawn from pension savings since 2015 was a “staggering amount of money in what is a relatively short space of time”.

Just Group group communications director, Stephen Lowe, added: “The first quarter of the financial year, which coincided with the height of the Covid restrictions, was quieter and although activity has picked up in the latest quarter, it is still a little lower than we would expect to see in more normal circumstances.

“It’s positive that people do not appear to have panicked and started emptying their retirement funds in great numbers. But these figures must be treated very cautiously because they don’t cover people who are just accessing tax-free cash or who are emptying pensions under ‘small pot’ rules.”

Aegon pensions director, Steven Cameron, noted that although it was “welcome” that the average amount withdrawn had fallen, there remains concerns that over-55s facing financial difficulties during Covid-19 would look to their pensions for short-term funds as we move through a second wave.

He continued: “Alongside Covid-19 there are other headwinds in the path of a stock market recovery, with ongoing uncertainty over Brexit negotiations. Those concerned over withdrawing from their pension in a volatile market should seek professional financial advice.

“Pensions are designed to provide an income throughout retirement and reducing the amount of income withdrawn during a period of downturn could be important for the longevity of the pension pot.”

Aviva workplace savings manager, Laura Stewart-Smith, concurred that the high volumes of people accessing their pension could have been “partly driven” by the financial strain of the pandemic and restrictions on economic activity.

“Money could have been withdrawn to offset falls in income,” she added. “It is vital consumers seek guidance and advice and carefully consider the costs and benefits of withdrawing money from their pension. Pension decisions made hastily are rarely productive ones.”

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