HMRC has just released its latest figures on the number and value of flexible payments from pensions: Read the full report here
The statistics show 327,000 people withdrew £2.2bn in flexible payments from their pensions in the last quarter of 2019, bringing the total withdrawals for the year to £9.4bn, a record year for the value of payments (£7.8bn in 2018, £6.5bn in 2017 and £5.7bn in 2016, the last full calendar year for which stats are available).
Looking at the quarter, this is a 24% increase in the number of people withdrawing cash compared to the same period in 2018 (264,000 people) and a 18% increase in the value of payments. Since the freedoms almost five years ago, people have flexibly withdrawn almost £33bn from pensions (from April 2015).
Andrew Tully, technical director at Canada Life, commented:
“Treating your pension like a bank account shows no sign of abating, and if anything five years on from the pension freedoms its only growing in popularity.
“Withdrawing cash can trigger unintended consequences, for example limiting the amount you can subsequently save into a pension. This can be very restrictive for people who are still working as HMRC restricts subsequent tax efficient pension savings to a very low £4,000 a year.
“Inevitably the significant amounts of cash leaving the pension system will in many cases be triggering large and often unexpected tax bills. But these tax bills don’t appear to be the natural brake on behaviour many predicated when the rules were changed. If anything people are seeking to strip cash from their pensions as rapidly as possible for fear of subsequent rule changes.
“The genie is well and truly out of the bottle.”
- You don’t have to take your whole pension in one go. You can spread withdrawals over a number of tax years, which will hopefully make the most of your personal allowance and mean you are likely to pay less tax.
- Think about what you are going to do with the money. There is no benefit in withdrawing cash from a pension (and paying tax on that withdrawal) to simply put the money in a bank account.
- Once you’ve flexibly accessed your pension, HMRC restricts the amount you can continue to save into your pension. This is called the Money Purchase Annual Allowance and is currently set at £4,000. This can cause problems if you plan to keep on working and both you and your employer are paying into your pension.
- Pensions are very tax efficient, and can have significant benefits for your estate from an inheritance perspective, so think about using other investments before you access your pension, for example an ISA.
- If you make a withdrawal, your pension provider is likely to apply an emergency tax code, which may well mean you pay more tax on the withdrawal than you expect. You can reclaim the tax directly from HMRC using one of three forms, P55, P53Z or P50Z. There is no need to wait until the end of a tax year to do so.
- It helps if you know the level of tax you are likely to pay, free calculators are available including here