First quarter sees £2.6bn withdrawn flexibly from pensions

The first three months of 2021 have seen £2.6bn withdrawn from pensions flexibly, according to new HMRC data.

This reflected a 6% year-on-year increase from the £2.5bn that was withdrawn during the same months in 2020.

Around 383,000 individuals withdrew from their pensions in Q1 2021, a total reflecting a 10% rise from 348,000 during the same months last year. The figures also revealed there was a 6% increase in the number of individuals withdrawing compared to the previous three months (360,000), which HMRC said was in line with seasonal patterns for previous years.

HMRC stated that the total value of flexible withdrawals from pensions since flexibility changes were introduced in 2015 has now exceeded £45bn.

Commenting on the figures, Aegon pensions director, Steven Cameron, noted that they give a complete year of data since the onset of the COVID-19 lockdown in March 2020.

“Over the period from April 2020 to March 2021, the pension freedoms have given people welcome flexibility that they appear to have used wisely,” Cameron said. “Over the last 12 months, those in drawdown will have been acutely aware of the changes in the value of their pensions due to stock market volatility, and many have sensibly decreased their withdrawals to avoid depleting their pension pots.

“However, quarter-on-quarter, in Q1 2021 the total withdrawn was up almost 10% which may indicate a return to taking more out of pensions.”

According to the figures, withdrawal numbers typically rise in October, November and December, before peaking in January, February and March, which coincides with the beginning of a new tax year.

HMRC suggested that this seasonality could be due to some individuals accessing their pension over a number of years and using the flexibility to withdraw funds at the beginning of the tax year.

Canada Life technical director, Andrew Tully, 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 (MPAA) that could come back to bite them, if they continue to contribute to their pension.”

AJ Bell senior analyst, Tom Selby, also suggested that those withdrawing flexibly from pensions must be aware of the impact of the MPAA, which reduces the amount you can save in a pension each year from £40,000 to just £4,000.

“The second quarter of 2021 will almost certainly see a sharp increase in withdrawals, as was the case in each year before the pandemic hit, as savers take advantage of a new set of tax allowances,” Selby said. 
 
“This draconian cut will leave many who have accessed their pension during a time of extreme financial distress – either for themselves or loved ones – severely hampered in their ability to rebuild their retirement pot post-lockdown.
 
“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.”

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