UK savers withdrew £9.4bn flexibly from their retirement pots during 2020, new HMRC data has revealed.

The latest figures showed that £2.4bn was withdrawn in the fourth quarter of the year, with 360,000 people accessing their pension in the final three months of 2020. This represented a 10% jump year-on-year, as well as a 4% rise against the previous quarter.

Pension freedom tax rules allow defined contribution pension schemes members to access their pension savings early, provided they have reached the required minimum pension age, which currently sits at 55.

The new HMRC data showed the total value of flexible withdrawals from pensions since flexibility changes were introduced in April 2015 has now exceeded £42bn.

AJ Bell senior analyst, Tom Selby, commented: “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.”

HMRC’s data also revealed the average amount withdrawn per individual throughout the fourth quarter of 2020 was £6,600. This figure reflected a fall of 3% from £6,800 during the same three months in 2019.

Canada Life suggested that anyone choosing to access their pension for the first time should be aware of the Money Purchase Annual Allowance (MPAA), which technical director, Andrew Tully, described as a “potential sting in the tail”.

The MPPA restricts the amount of money people can save into their pension once they’ve flexibly accessed it, with the limit currently set at £4,000 a year.

“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,” Tully said.
 
“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.”

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