People making flexible pension withdrawals up by 23% to reach record levels

The number of individuals taking flexible pension payments in Q1 2020 leapt by 23 per cent compared to 12 months prior, according to HMRC data.

The figures showed that 348,000 people flexibly withdrew from their pensions during the period, the highest number ever recorded in a three-month period, while the total amount withdrawn climbed by 19 per cent year-on-year to £2.5bn.

The average amount withdrawn per individual in Q1 2020 was £7,100, falling by 3 per cent from £7,300 in the same period in 2019 and following the trend of steady declines in average withdrawals since reporting became mandatory in the second quarter of 2016.

The figures showed that £35bn has been withdrawn by 1.4 million individuals since pension freedoms was introduced 5 years ago, with the total withdrawals from the 2019/20 tax year reaching a record high of £9.61bn.

Withdrawal numbers typically rise in the first quarter before peaking in the second, meaning that the next quarter is likely to see further record numbers of people flexibly withdrawing.

Aegon pensions director, Steven Cameron, said: “For those facing financial difficulty, pension freedoms offer flexibility to ease financial burdens in uncertain times, such as those we are experiencing today.

“However, freedom comes with great responsibility and it is crucial that people understand the risks associated with drawing down their retirement savings which for many need to last a lifetime. For many, it may be better and more tax efficient to use other sources of savings first.”

Just Group communications director, Stephen Lowe, said: “Using pensions for emergency funds means less retirement income later and it can also restrict a saver’s ability to refill their pension fund if they become subject to the strict Money Purchase Annual Allowance rules that limit annual contributions receiving tax relief to just £4,000 a year.

“We would urge people to consider other options first, such as checking what state benefits may be available to them or first using cash accounts which they may have put aside for a ‘rainy day’ like this.

“Where people see a pension as the only option, then first they should use the free, impartial and independent guidance offered by Pension Wise to ensure they understand all the potential consequences. This could help them defer making a rushed decision that they may regret in the future.”

Canada Life technical director, Andrew Tully, expressed concern that recent research showed some savers were simply making withdrawals to “save the money in a bank or invest elsewhere”, adding that this strategy “makes no sense whatsoever”.

“People are paying significant tax on withdrawals, as many are withdrawing pension money while still working. In addition, money within pensions can be passed on to family in a very tax efficient way, and normally free of inheritance tax, so many people should be leaving their money in the pension until it is required for income or to meet other clear spending commitments,” said Tully.

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