The statistics show a record 336,000 people withdrew £2.75bn in flexible payments from their pensions in the second quarter of the year. This is the highest number of individuals (up 27% on the same period last year) and a record amount withdrawn in any quarter. Each person made on average two withdrawals in cash in just three months. Average withdrawal values are down slightly though for quarter 2 at £8,200 (from £8,600 in the same period in 2018).
Since pension freedoms, £28.37bn has been flexibly withdrawn from pensions, by nearly 2.2 million people. Each person has made on average six withdrawals.
Commenting on the statistics, Andrew Tully, Technical Director, Canada Life, said:
“The appetite to access pensions cash shows no signs of abating. These record numbers show just how much is being paid out on a regular basis which people will be paying tax on, which might be positive for HM Treasury but is probably not the most efficient way to access your pension.
“Our research suggests only a third of people seek financial advice before accessing their pension, leaving people exposed to a new set of risks including paying too much tax than necessary on withdrawals, or leaving the money languishing in low interest deposit accounts. The risk of running out of money is very real, as there are no mechanisms to prevent people depleting their pots too quickly. Conversely, there is also the risk that people don’t spend enough in retirement for fear of running out of money.
“Without the right financial advice, most people will not achieve the best outcome in retirement.”
What have people used their cash lump sums for?
Source: Canada Life 20.3.19 (note respondents could tick all that apply)
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. It helps if you know the level of tax you are likely to pay, free calculators are available including here