A record number of savers made withdrawals from their pensions flexibly in the first quarter of this year, but the full effects of the Covid-19 crisis on pension savings remains to be seen.
A total of 348,000 people made withdrawals during January to March, up 23% from the same period of 2019, according to data published by HM Revenue & Customs. Meanwhile, savers withdrew £2.5 million, up 19% from £2.1 billion withdrawn during the first quarter of 2019.
The latest figures bring total withdrawals for the 2019/20 tax year to £9.81 billion, marking a record year for the value of payments. In the five years since pension freedoms were introduced, pension holders have withdrawn £35.44 billion.
Commenting on the first quarter figures, Ian Browne, retirement expert, Quilter, said: “Even for normal trends, the increase is substantially more than we have seen in the past. It may be volumes increased as people, nervous about stock market volatility or Covid-19 in general started withdrawing more money. Next quarter’s figures should further illuminate the picture and in fact we could see the numbers go either way.
“People may withdraw less from their pensions as their expenses have declined or we may see that people are tapping into their pensions more as they are looking to fill a gap left due to being furloughed or some other unforeseen circumstances. This combined with the recent negative investment performance can wreak havoc on a pension.”
Tom Selby, senior analyst, AJ Bell, said the figures were unlikely to capture any real impact of Covid-19, but the effects would be felt going forwards.
He said: “It’s worth noting the Q1 2020 figures mostly relate to the months before lockdown hit, and so are unlikely to capture any substantive shift in behaviour resulting from COVID-19. Given the dramatic impact the pandemic has had on markets and people’s incomes, it will inevitably drive the pension access decisions many people make in Q2 2020 and beyond.”
Research commissioned by AJ Bell suggested that over one in 10 over-55s have already accessed or plan to access their pension as a result of Covid-19.
Selby added: “Anyone going down this route needs to think carefully about the sustainability of their retirement income strategy. Others will be considering deferring retirement or reducing their withdrawals in order to avoid ‘selling on the dip’ and to ensure they don’t risk running out of money in later life.
“In both cases the key message to investors is to stay calm and make sure you understand the long-term impact of the decisions you are taking today.”
Steven Cameron, pensions director, Aegon, said there continues to be a “big question mark” over how the use of pension freedoms will be affected by Covid-19.
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.”
Despite a rise in the number of people making withdrawals, official figures continued to show a steady decline in the average withdrawal per person, suggesting people are generally using the pension freedoms sensibly rather than to splurge. On average, pension savers withdrew £7,100 during the first quarter of 2020, down from £7,300 a year earlier.
However, Andrew Tully, technical director, Canada Life, said research had shown people are often withdrawing cash from their pension to save in the bank and warned this could have negative consequences.
Tully explained: “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.
“Being pragmatic about the current volatility we are experiencing and thinking ahead is crucial. Withdrawing cash when markets are so fluid, more than likely crystallising losses in the process and paying tax simply for the money to sit in a bank account is clearly not sensible.”
