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HMRC data shows pension freedoms rise but what impact MPAA?

4 May 2021

Flexible pension withdrawals were £2.6 billion in the first quarter of 2021, up 6% year-on-year, as the pension freedoms continued to grow in popularity among pension savers.

In total, more than £45 billion has been withdrawn flexibly from pension since the pension freedoms were introduced in April 2015.

The latest figures from HM Revenue & Customs showed 383,000 individuals made withdrawals throughout the first three months of 2021, a 10% increase from 348,000 during the same months of the previous year. It also marked a 6% rise on the number of pension investors accessing their savings during the fourth quarter of 2020, in line with seasonal patterns seen in previous years.

However, while overall withdrawal numbers are up, the average amount withdrawn per person fell 4% to £6,800 during the first quarter compared to £7,100 during the first three months of 2020.

The question is, are people being more sensible with their withdrawals or is this a blip on the chart?

Steven Cameron, pensions director at Aegon, said: “Over the period from April 2020 to March 2021, the pension freedoms have given people welcome flexibility that they appear to have used wisely. Over the last 12 months, those in drawdown will have been acutely aware of the changes in the value of their pensions due to stock market volatility, and many have sensibly decreased their withdrawals to avoid depleting their pension pots.

“Looking ahead, markets are much healthier that they were a year ago and, after a year of reduced opportunity to spend, many retirees could be amongst the pandemic’s ‘accidental savers’, finding their bank balances also looking healthy. Historically, we have seen a peak in how much people withdraw from their pension in Q2, but this year we’d urge over 55s to think carefully before dashing to their pension for cash.”

Tom Selby, senior analyst at AJ Bell, commented: “2020 was the most challenging year many of us have faced as Coronavirus and the subsequent lockdown fundamentally altered our lives. That 12-month period also presented a huge test for retirement investors, with markets in freefall in March and April and millions facing tough choices about whether to tighten their belts to ensure their plans remained on track.

“With 2020 now thankfully behind us, pension withdrawal patterns appear to be returning to what we saw before the pandemic struck. This likely reflects increased consumer confidence as society gradually opens up, the success of the vaccine programme and a rally in investments since April last year.”

Impact of MPAA on pensions freedoms

However, there was a general consensus among industry experts that the ongoing popularity of the pension freedoms should prompt the Government to review the “draconian” Money Purchase Annual Allowance rules.

Ian Brown, pensions expert at Quilter, said: “This pandemic has changed our financial planning habits for good. There are a number of people who are now newly motivated to plan for their retirement, while others have clearly felt the need or desire to retire early. As the number of people accessing their pension reaches record highs, it brings into focus more the quirks of the pension system that need ironing out.

“The Money Purchase Annual Allowance is arguably preventing a cohort from accessing their pensions flexibly but wishing to maintain some level of employment. The pandemic was the perfect opportunity to assess the use of these policies, but it appears the government remain stubborn at keeping it in.”

Selby echoed the sentiment: “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.”

Andrew Tully, technical director at Canada Life, warned that there is not enough awareness of the rules among pension investors.

Tully explained: “It continues to be essential that anyone choosing to access their pension for the first time is aware of the Money Purchase Annual Allowance. With the limit set dangerously low at £4,000 it could severely limit the amount you are able to save in the future. Particularly given the impact of the pandemic, we need to consider a significant increase to the allowance or better still remove it altogether.”

According to a recent Canada Life survey, nearly one in six (14%) of over-55s have flexibly accessed their pension over the last year but two fifths of all respondents were unaware of any restrictions.

Tully added: “Many overestimated the allowance as almost £7,000 a year, almost double the real MPAA limitation. Exceeding the MPAA can lead to tax penalties for people at every earnings level. It means future contributions to defined contribution schemes are limited to £4,000 a year, and people lose the ability to carry forward unused allowances from the previous three tax years.”

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