Flexible pension withdrawals top £30 billion but are savers being tax savvy?
3 November 2019
Flexible pension withdrawals have topped £30 billion since pension freedoms were introduced in 2015, official statistics have shown.
Data released by HM Revenue & Customs showed £2.4 billion was withdrawn from pensions during the third quarter of this year, up 21% from the £2 billion withdrawn in the same period of 2018. In total, £30.74 billion has been flexibly withdrawn from pensions since April 2015.
According to HM Revenue & Customs, 327,000 people accessed their retirement savings in the three months from July to September, an increase of 27% on the same period of 2018.
However, the average withdrawal for the quarter was £7,250, a fall of 5% from £7,600 recorded during the previous year’s third quarter.
Andrew Tully, technical director at Canada Life, warned that that people are not sticking to the rules “as there are no rules”, leaving them at risk of large tax liabilities.
He said: “People continue to be attracted to stripping cash out of their pensions. This is often before planned retirement ages, and will inevitably in many instances be triggering large tax bills. On the one hand it shows the pension freedoms are working, but it also shows an emerging picture of large amounts leaving the pension system potentially leaving very little for people to live on by way of a regular income. People are not sticking to the rules as there are no rules.
Tully pointed out that stripping cash from a pension can trigger unintended consequences including limiting the amount people can subsequently save into a pension. This can be restrictive for those who plan to continue working and they and their employer continue to pay in.
He added: “Our research suggests only a third of people seek financial advice before accessing their pension, so many will be blissfully unaware of the pitfalls or indeed the amount of tax likely to be paid.”
Savers getting savvy on tax?
However, Steve Webb, director of policy at Royal London, said the drop in average withdrawal amounts suggests savers are being “savvy” about reducing their tax bill.
“Pension freedoms have been hugely popular and allow hundreds of thousands of people every quarter to draw on their pension savings in a flexible way. There is also evidence that people are being savvy about the timing of their withdrawals, spreading them over more than one tax year to reduce their overall tax bill. But it remains the case that we need to increase the proportion of people who take financial advice or guidance before making decisions about how much of their pension to withdraw.”
Ian Browne, pensions expert at Quilter, echoed the sentiment that pension savers must seek advice, following research by Moneyfacts that showed almost 30% of savers who take a regular income from their pension took in excess of 8%. More than one in 10 (13%) have fully depleted their fund.
Browne commented: “Unsustainable withdrawal rates from pensions are the bleak shadow hovering over the success of pension freedoms. If continued it can mean that despite people having saved throughout their life for retirement they are then faced with pensioner poverty as they live longer than they had anticipated and spent too much too soon.
“The complex scenario planning for retirement means forward planning is crucial and this is why getting advice at this stage is so vital. In fact, the Moneyfacts findings also revealed people who do not take advice are more likely to run out of funds than those who take professional advice.”
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