Savers withdrew £9.4bn flexibly from their retirement pots during 2020, new HMRC data pubished today has revealed.
Some 360,000 people accessed their pension in the final three months of 2020, up 10%YoY and 4% versus the previous quarter.
This quarter-on-quarter rise is counter to previous trends and may reflect savers dipping into pensions as a result of covid-19.
Anyone over 55 who flexibly accesses taxable income from their pension is subject to the ‘money purchase annual allowance’, reducing the amount they can save for retirement from £40,000 a year to just £4,000."
Average per person withdrawals continue to fall, dropping from £6,715 in Q3 2020 to £6,583 in Q4
Treasury urged to reinstate £10,000 money purchase annual allowance (MPAA) so savers aren't unfairly punished for accessing their own money.
Tom Selby, senior analyst at AJ Bell, commented: "In a year like no other, retirement income investors faced their first major economic challenge since the pension freedoms were introduced in April 2015."
"As lockdown gripped the economy and markets went south in March and April 2020, the risk of "pound cost ravaging' - where large pension withdrawals come at the same time as big investment losses - loomed large for those accessing their retirement pot."
"The fact year-on-year withdrawals dropped 17% during this torrid period suggests many savers were sensible, choosing to either delay accessing their pension, pause withdrawals or reduce the amount they were taking as income.
"Since then we have seen the number of people accessing their pensions and total withdrawals rise, which is unsurprising given markets have recovered and so investors will feel more comfortable returning to ‘normal' retirement income behaviour. There is also likely to be some pent-up demand in the system following the drop in withdrawals we saw in the second quarter of 2020.
Selby pointed out, "However, there will inevitably be those who have had to access taxable income from their pension during this period as a result of Coronavirus. Given the exceptional circumstances that people have faced in the last 12 months, Chancellor Rishi Sunak should urgently review the money purchase annual allowance (MPAA) these savers are currently subjected to."
Source: AJ Bell analysis of HMRC data
The case for reviewing the MPAA
"Anyone over 55 who flexibly accesses taxable income from their pension is subject to the ‘money purchase annual allowance', reducing the amount they can save for retirement from £40,000 a year to just £4,000. When someone triggers the MPAA they also lose the ability to carry forward up to three years of unused allowances in the current tax year.
"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 older relative cover care costs. But regardless of the circumstances, the MPAA is applied indiscriminately and permanently.
Selby added: "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 covid-19 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."
"We are now seeing a gradual continuing upwards trend in both the number of individuals opting to withdraw money from their pension savings, and the amount they are choosing to take. This growth towards the end of the year could well be down to pent-up demand from the first half of the year when most of the country was in various states of lockdown.
Andrew Tully, technical director, Canada Life, added: "We have now seen more than £40bn withdrawn from pension savings since the inception of pension freedoms in 2015. A huge sum of money to be withdrawn in a five year period. This continued growth in the number of individuals accessing their pensions implies that we are seeing more and more working people look to their pension pot to manage their expenses or cover unexpected costs."
"It is absolutely essential that anyone choosing to access their pension for the first time should be aware of a potential sting in the tail - the money purchase annual allowance. This is especially important for those of working age who want to continue paying into their pension. With the current savings 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."