During these challenging financial times, to what extent have pension savers been raiding pension pots?
The latest flexible pension withdrawal figures from HM Revenue & Customs suggest that pensions have not, to date, been the target of raids to help shore up household income.
Marking the fifth anniversary of the pension freedoms which allowed for flexible withdrawals, the data shows 348,000 people withdrew a total of £2.5bn in flexible payments from their pension pots in the first quarter.
It means total flexible pension withdrawals for the 2020/21 tax year totalled £9.81bn, a new record amount.
More than £35bn has been taken flexibly from pension pots in the five years since the pension freedoms were introduced in April 2015.
In the last three months, there was a nearly one-quarter increase in the volume of flexible pension withdrawals, when compared with the same period last year.
The value of flexible withdrawals taken from pension pots also increased by 19%, from £2.06bn in the first quarter of last year, to £2.46bn in the first quarter of 2020.
So, whilst people have made full use of pension flexibilities since the freedoms were introduced, the average amount withdrawn continues to drop. This indicates that people are taking a more measured approach to drawing pension income rather than raiding the pension piggy bank at the first opportunity.
Since the introduction of pension freedoms in 2015, taking flexible withdrawals from pension pots has become a very popular way of delivering retirement income. In the midst of the coronavirus situation, there’s obviously a danger that some retirees might treat their pension pots like a current account, raiding their pension pots to top-up household finances.
There are obviously various risks attached to accessing a pension early as an emergency fund in this way. Money withdrawn will not be available later, nor is it invested and able to produce gains in due course.
For those facing financial difficulty, it is crucial that people understand the risks associated with drawing down their retirement savings, which for many need to last for their lifetime. Using pensions for emergency funds means less retirement income later.
Accessing your pension pot early could also mean the amount that can later be paid into a pension with the benefit of tax relief is slashed from £40,000 a year to just £4,000, due to the strict Money Purchase Annual Allowance rules.
For many, it could be better and more tax efficient to check other options first, such as checking what state benefits may be available to them or using any cash accounts that they may have put aside for emergencies such as this.
However, if people believe their pension is the only option, it makes sense to get some financial advice first, to ensure both that this is the case and to help them proceed in the best way possible.
Flexible withdrawals from pensions should be carefully planned, to make the best decisions around taxation and investments, but also to ensure the sustainability of any withdrawals over the long-term.
Another factor to consider during the coronavirus pandemic is the prevalence of scams, with fraudsters targeting pension savers to offer higher returns or tax-free access to their money.
The advice to investors therefore is be very careful before withdrawing cash from your pension pot – and if in doubt, get some professional financial advice.
For help with your retirement planning and other financial planning needs, contact Kellands today.
Pension investment funds and the income from them may fluctuate and can fall as well as rise. Eventual retirement income will depend on the size and value of your pension pot, future interest rates and tax legislation. Tax treatment is dependent upon individual circumstances and may be subject to change in future.