Savers tap in to their pensions as Covid-19 saps cash

Covid-19 hardship is leading record numbers of people to dip into their pension savings early.

Record numbers of savers made withdrawals from their pensions during the first quarter of the year, new figures show, prompting warnings that the pandemic may be forcing people to dip into pensions cash. 

Some 348,000 savers withdrew £2.5bn from their pension funds under the pension freedom reforms between January and March, new data from HM Revenue & Customs shows, with pension advisers warning of potential adverse impacts on people’s tax bills and long-term financial planning.

First-quarter withdrawals from pensions were around 19% higher than in the same period of last year. But pension advisers fear the second quarter may have seen an even more substantial trend towards higher pension withdrawals, given that the UK’s Covid-19 crisis did not begin to grip the country until mid-March. Advisers warn that while savers over the age of 55 are entitled to dip into their savings – and that pension funds might be a tempting target for those suffering financially because of Covid-19 – doing so could result in a large tax bill. 

Savers going above their tax-free cash allowances pay income tax on withdrawals. Taking out larger sums, or even their whole pension, could push them into a higher income-tax band.

There is also the risk that pension withdrawals made early on will leave savers without sufficient cash to see them through retirement.

Some older people are also exploring other options for securing additional cash during the pandemic. The Equity Release Council said the number of older people borrowing against the value of their property with an equity-release plan increased by 14% during the first three months of the year. Since then, specialist equity-release advisers have reported a substantial increase in enquiries about the product.

Elsewhere, the Pensions Regulator has ordered pension schemes to prioritise switching requests made by savers looking to move their pension savings. There have been claims that the industry is using the Covid-19 pandemic as an excuse to delay carrying out the instructions of savers who want to take their money elsewhere. 

The regulator pointed out that schemes are entitled to delay switches of final-salary or other defined-benefit pension plans where there have been fears about poor advice. However, no such rules apply to defined-contribution transfers. 

Recommended

Make sure you max out your pension contributions this year
Pensions

Make sure you max out your pension contributions this year

If you're saving for retirement, make sure that you have used up all their allowances before the tax year ends, and contributed as much to your pensio…
31 Mar 2021
Make sure you don't go over the pensions lifetime allowance
Pensions

Make sure you don't go over the pensions lifetime allowance

Breaching the lifetime allowance for pension savings could prove very costly, says David Prosser.
15 Mar 2021
Women could be compensated for state-pension shortfall
State pensions

Women could be compensated for state-pension shortfall

A government inquiry has said that up to 200,000 women could be owed a collective £1.7bn in compensation, with the average woman being owed £13,500 in…
12 Mar 2021
What is the pensions lifetime allowance and should you be worried about hitting it?
Pensions

What is the pensions lifetime allowance and should you be worried about hitting it?

In his recent Budget the chancellor froze the pensions lifetime allowance at £1,073,100. That may sound like a lot to have in your pot, but you could …
11 Mar 2021

Most Popular

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?
Bitcoin

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?

As bitcoin continues to soar in value, many of the world’s central banks are looking to emulate it by issuing their own digital currencies. But centra…
8 Apr 2021
House prices: from boom to even bigger boom
House prices

House prices: from boom to even bigger boom

UK house prices have risen to new to record highs, says Nicole Garcia Merida. Demand continues to outpace supply, but continued low interest rates, th…
9 Apr 2021
Nuclear power might never be popular – but now looks a good time to invest
Commodities

Nuclear power might never be popular – but now looks a good time to invest

Nuclear power gets a very bad press, but it is the ultimate renewable energy source. Interest in it is perking up again, says John Stepek. Which means…
9 Apr 2021