The pension freedom tax rules allow members of defined contribution pension schemes to access their pension savings early. This is provided that they have reached the normal minimum pension age, which is currently 55. The July 2019 Official Statistics showed that in this quarter (Q2 2019), £2.75 billion was withdrawn form pensions flexibly. In this quarter, a record 336,00 individuals withdrew form their pensions – up 27 per cent since the 2019 second quarter.
The amount is a 21 per cent increase from £2.27 billion in the same quarter last year.
In total, since the changes have come into effect back in 2015, £28 billion has been flexibly withdrawn from pensions, HMRC said.
Total withdrawals in the second quarter are typically larger than in other quarters, due to some taxpayers planning their withdrawals around the start of the new tax year.
HMRC said that while this has previously been driven by larger value withdrawals, this year, it’s driven by the increased numbers of people making withdrawals.
Tom Selby, senior analyst at AJ Bell, commented: “Four years on from the introduction of the pension freedoms reforms and we are finally getting a clearer picture of how people are using the flexibilities.
“On the whole the available evidence points to savers acting in a sensible manner, taking steady incomes from their funds rather than raiding their nest eggs and splurging in a way which could leave them struggling in later life.
“AJ Bell’s own research on this subject also suggests, in the main, withdrawals are being managed in a sustainable way.
“Of course there are no shortages of potential headwinds threatening investors, from the increasing threat of a no deal Brexit to the ongoing tensions between Donald Trump and China.
“Anyone who remains invested in the stock market and is drawing an income in retirement needs to be mindful of these risks and consider the impact a severe drop in markets – and any corresponding fall in the value of their fund – could have on their future spending plans.
“This risk is particularly prevalent where savers are taking large withdrawals in the early years of retirement, which is why it is critical people using the pension freedoms are engaged and regularly review their retirement strategy.”
Steve Wilkie, managing director of retirement mortgage experts Responsible Life, said: “Those of pension age have sent use of flexible pension payments ballooning to another all time high, extracting a record amount of savings as they’ve done so.
“The pace of growth in the number of people taking advantage of these pension freedoms is actually slowing but that overall trend remains an afterthought at present, eclipsed as it is by huge leaps in adoption.
“This long tail trend of incredible annual increases in the number of people dipping into pension pots, visible ever since freedoms were introduced in 2015, will burn brightly for some time, largely thanks to generational changes.
“With every year that goes by, a younger cohort of people entitled to access their pension pots comes into play, and these ‘youngsters’ are well used to having their way and making their finances work for them.”
Tim Holmes, Managing Director at Salisbury House Wealth, commented: “People withdrawing money from their pension should do so under extreme caution – once it’s gone it’s gone.
“It is becoming increasingly trendy for individuals to make withdrawals at age 55. However, many may be doing so without fully understanding the implications.
“When taking money out of pensions, you reduce the amount you can contribute again and still benefit from tax relief. If this limit is breached then hefty tax charges follow. This can be easily done, for example, through employer contributions.
“You can get tax relief on pension contributions up to £40,000 a year or 100 per cent of your taxable salary (whichever is lower).
“But if you take more than your tax free cash from a Defined Contribution pension scheme, the amount you can pay into a pension and still get tax relief reduces to £4,000 per year under Money Purchase Annual Allowance rules.
“Most people are unaware of the implications of this and once triggered it cannot be rectified. There are just too many pension rules out there that people are unaware of and if accessing benefits people must get advice.”
Mr Holmes added: “Low annuity rates could also be a driver of the high levels of withdrawals. Many people hoping to live on their pension savings are having to hunt for higher yielding assets outside annuities.
“Care must be taken to ensure that people do not put themselves into difficult financial positions later in life.”