A massive £45bn has now been withdrawn flexibly from pensions since the retirement freedoms were introduced in April 2015, according to HMRC statistics released today (30 April) covering withdrawals in Q1 2021.
The statistics showed 383,000 people withdrew £2.6bn in flexible payments from their pensions in the first quarter of 2021.
This is a 6% increase in the number of individuals withdrawing year-on-year from Q1 2020 and a 4% fall in the average value of withdrawals to £6,800. The number of withdrawals is 6% higher than in the previous quarter.
Comparing tax year 2019/20 to 2020/21, the overall number of payments and number of individuals has increased in the last tax year, but the overall value of payments has reduced by £220m.
We’ve hit a record high for the number of people choosing to withdraw from their pension this past quarter but looking back over the pandemic year the overall value of withdrawals are down from the peak."
Reaction from industry experts had a common underlying theme in calling again for the relaxation or complete removal of the Money Purchase Annual Allowance (MPAA) rules.
Ian Browne, pensions expert at Quilter said: "The latest pension income statistics show a stable trend as more and more people become familiar with pension freedoms and the possibilities they have with their cash. There were fears as the pandemic took root that 2021 was going to be a difficult year and we would see significant spikes in pension access. While the number of payments and total value has risen, it is nothing out of the ordinary and clearly the government support schemes are doing their job and helping to prevent a mass exodus of savings that we might otherwise have seen by now.
He added: "The Money Purchase Annual Allowance is arguably preventing a cohort from accessing their pensions flexibly but wishing to maintain some level of employment. The reduction in your annual allowance after taking just 1p from your pension could materially impact someone looking for short-term financial relief from their pension or those who want to enjoy semi-retirement. The pandemic was the perfect opportunity to assess the use of these policies, but it appears the government remain stubborn at keeping it in.
"The stats also reveal that HMRC has had to pay back £23,183,421 in tax in Q1 this year as a result of the incorrect amount being taken from pension income. This highlights the importance of getting financial advice before touching your pension. The onus will be on the individual to reclaim this tax and they should not expect HMRC to be proactive in handing the cash back."
While Tom Selby, senior analyst at AJ Bell, said: "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.
"Even in this sun-soaked, ebullient mood, those accessing their pension flexibly need to think carefully both about how their retirement pot is invested and the sustainability of their withdrawal plan."
Selby added: "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 said: "We've hit a record high for the number of people choosing to withdraw from their pension this past quarter but looking back over the pandemic year the overall value of withdrawals are down from the peak.
"This is likely down to the inability to spend on big ticket items like holidays, but people have been bolstering their finances using their pensions as bank accounts. The issue here is the unintended consequences of the Money Purchase Annual Allowance that could come back to bite them, if they continue to contribute to their pension.
"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.
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