A total of £2.4 billion was withdrawn from pensions flexibly in the final three months of 2020, up 6% year-on-year, as Covid affected saver behaviour, according to HMRC.
This took the total amount withdrawn since the introduction of pension freedoms to more than £42 billion.
The latest figures published by HM Revenue & Customs revealed that 360,000 individuals withdrew from pensions flexibly throughout October, November and December, an increase of 4% on the previous three months and 10% year-on-year.
According to HMRC, the number of individuals making withdrawals typically drops during the fourth quarter after peaking in April, May and June but the tax office said the Covid-19 pandemic had prompted a change in behaviour.
However, the average amount withdrawn during the final quarter fell once again to £6,600, down 3% on the same period of 2019. Since records began in 2016, average withdrawals have fallen consistently.
In total, savers withdrew £9.4 billion from their pensions during 2020.
Jon Greer, head of retirement policy, Quilter, said: “With 2020 now in the rear-view mirror, it is clear it has had a profound effect on the way people interact with their pensions. The 10% increase of people taking payments from their pensions compared to the same quarter in the previous year is a worrying trend and begins to show more and more people are requiring additional money as lockdown restrictions remain in place.
“While unemployment and redundancies are increasing, we expect these to climb higher as government support schemes are withdrawn. As such, it will be crucial watching these figures going forward as many are going to feel like they need to dip into their pension to cover bills and expenses.”
Tom Selby, senior analyst, AJ Bell, said that while many savers acted sensibly, there will inevitably be those who were forced to access income from their pension as a result of Covid-19. As a result, Selby has urged the Government to review the money purchase annual allowance (MPAA).
Selby explained: “Given the exceptional circumstances that people have faced in the last 12 months, Chancellor Rishi Sunak should urgently review the MPAA these savers are currently subjected to.
“The reasons for taking taxable income from your pension could vary from replacing lost salary from employment to helping a younger relative pay their bills or an older relative cover care costs. But regardless of the circumstances, the MPAA is applied indiscriminately and permanently. This enormous annual allowance cut felt unfair during normal times, but at a time when many savers and their families are facing extreme financial hardship it seems particularly cruel.
“Given the impact Coronavirus will continue to have on people’s finances in 2021, there is a strong case for halting the application of the MPAA so people who access taxable income from their pension are not hampered in their ability to rebuild their retirement pot once this crisis is over. At the very least, the Treasury should consider raising the MPAA back to £10,000 – the level it was set at when first introduced in April 2015.”
The latest pension withdrawal figures come ahead of the introduction of investment pathways. From the 1 February, pension providers will offer new support for individuals who decide to take a flexible retirement income through drawdown but who choose not to take financial advice. However, Steven Cameron, pensions director, Aegon, cautioned that it should not be viewed as a replacement for advice.
Cameron said: “With the popularity of the pension freedoms ever increasing, pathways are designed to help steer individuals away from inappropriate investment approaches. However, they will not help in deciding how much income to take. Pensions are designed to provide an income throughout retirement and investment pathways do not replace the need for tailored professional financial advice.”
