Britons use pension freedom rules to tap into retirement pots at record rate

Britons are pillaging pension pots to cope with cost of living pressures, new HMRC figures indicate.

Between April and June, a record amount was withdrawn via pension freedom rules, with more than half a million people raiding retirement funds during this period.

In total there were 1.25million withdrawals made worth a collective £3.57billion – a 23 per cent increase compared to the same period in 2021.

This is a rise of more than £1billion withdrawn compared to the first three months of the year.

Desperate times, desperate measures: Pension withdrawals have surged as the cost-of-living crisis forces Britons to dip into their retirement pots

It is the highest figure recorded in a three month period since the rules were introduced in 2015.

They give people greater access to defined contribution pension pots from the age of 55, with the first 25 per cent tax free.

This can be used as a pure cash withdrawal, put into other retirement income products or a combination of the two, while people can choose to continue to work. 

The record high withdrawals comes at time when living costs have been rising at a 40 year high. 

Between March and June, CPI inflation rose from 7 per cent to 9.4 per cent, with the cost of energy, fuel and food in particular rising at alarming rates.

The new figures by HMRC suggest that an increasing number of people are turning to their pension pots to cope with the escalating costs and there are concerns that some may be jeopardising their retirement as a result.

Steve Webb, a partner at LCP said: ‘These dramatic figures are the clearest sign yet that people are turning to their pensions to help them with the cost of living crisis.

‘In Spring, pensions and benefits only rose by around 3 per cent when inflation was already around 9 per cent.

‘For those who have run down cash savings, it seems that the pension is their next port of call.

‘It would be worrying if the only way people could cope with the cost of living crisis was by ravaging their living standards in retirement.’

Will we see a new record amount withdrawn this year? 

Since April 2015, the total value of taxable payments withdrawn flexibly from pensions has exceeded £59billion.

However, there was a noticeable spike in withdrawals last year – at the same time inflation began rising.

There was a further spike between April and June this year – coincidentally as inflation reached a 40 year high.

The numbers of people turning to their pension early and the average amount being withdrawn each time appears to be rising as well.

403,000 people withdrew flexibility from their pensions between January and March this year compared to 508,000 between April and June

The average taxable withdrawal rose from £5,700 between January and March to £7,000 between April and June this year.

The value of taxable flexibly accessed pensions and number of individuals accessing these payments has risen gradually since 2017. But it spiked to a record high this year.

The value of taxable flexibly accessed pensions and number of individuals accessing these payments has risen gradually since 2017. But it spiked to a record high this year.

The Bank of England is expecting inflation to peak at 11 per cent in October and experts believe Britons may continue to tap into their pension wealth to cope with the rising cost of living. 

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown said: ‘People have been prudent when it comes to accessing their pensions under Freedom and Choice but this data shows the cost of living crisis is starting to bite with a surge in the number of people accessing their pension in recent months.

‘We’ve seen the numbers of people accessing their pensions steadily increase over the years but the shift between April and June this year has been especially sharp with over half a million people taking the plunge

‘We could see this increase yet further over the coming months as soaring food and energy prices put pressure on pensioner incomes.’

There are also concerns that people taking taxable income from their pension for the first time will also have their ability to rebuild their retirement pot severely restricted.

Tom Selby, head of retirement policy at AJ Bell says: ‘Taking even £1 of taxable income flexibly from your pension will trigger the money purchase annual allowance (MPAA), permanently reducing your annual allowance from £40,000 to just £4,000. 

‘You will also lose the ability to ‘carry forward’ up to three years of unused allowances in the current tax year.’

Additionally, HMRC treats lump sum pension freedom payments as if they are a permanent increase in income and applies an emergency tax code.

As a result, savers have been overtaxed to the tune of £892million since 2015, AJ Bell analysis shows.

You can get a tax refund within 30 days if you fill out a form. Otherwise, you have to wait until the end of the tax year. 

How can people access their pension without triggering the MPAA?

Tom Selby, head of retirement policy at AJ Bell replies:

1) Just take your tax-free cash

While accessing taxable income flexibly from your pension will trigger the MPAA, withdrawing your tax-free cash won’t. 

It is possible to ‘partially crystallise’ your fund so you just take out the tax-free cash you need, with the rest left in your fund and able to grow tax-efficiently.

2) Take a small pot withdrawal

If your fund is worth £10,000 or less you can withdraw both the tax-free and taxable element flexibly without triggering the MPAA. 

You must extinguish the entire fund in order not to trigger the MPAA. You can take up to three small pot withdrawals worth £10,000 or less in your lifetime.

3) Capped drawdown

Capped drawdown is no longer available, but some savers who were in capped drawdown before April 2015 have remained in it. 

Provided any withdrawals taken via capped drawdown do not exceed the maximum income limit (150 per cent of the GAD annuity rate), the MPAA will not be triggered.