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.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

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.

David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.