Huge sums of money were withdrawn from private pensions in the first half of the year, new data from HM Revenue & Customs (HMRC) reveals.
The figures show that between January and June of this year a total of £7.5 billion was withdrawn by 1.1 million people from private pensions. The number of pension withdrawals shot up by 17% from the same period in 2022, while comparing back to 2020 the jump is an even more significant 67%.
It has led to experts warning that the rising cost of living is causing pension savers to dip into their pension pots more frequently, and more sizeably, than has previously been the case.
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Should you take money out from your pension pot early?
Pensions savers can raid their pension pot from age 55. You can withdraw up to 25% of your pension pot tax-free – either as a lump sum or in instalments – regardless of the size of your savings. In 2028, the age you can access your pension is increasing to 57.
But it seems more of us are taking money out younger and this week’s figures from HMRC showing an increase in withdrawals could be a cause for concern.
Alice Guy, head of pensions and savings at interactive investor, said the situation was “extremely worrying”, noting that building a decent pension takes years of dedication and hard work but that this could be put at risk by withdrawing money at “potentially unsustainable rates”.
She added that the raising of the state pension age meant it was common for some savers to experience a gap between when they wind down work and start to receive the state pension.
“We sadly see that many people in their mid-sixties are struggling to make ends meet before they receive the state pension at 67. This means that many older workers are facing a huge dilemma, often needing to focus on immediate needs over long term financial goals,” Guy concluded.
However, others have suggested that the figures do not represent a raid on pensions.
Hargreaves Lansdown argued that the number of people making flexible withdrawals grows every year as more people reach pensionable age, meaning it is more useful to focus on the average withdrawal size.
And here there does not appear to be a huge change. Between April and June this year pension savers withdrew an average of £7,143 per person, only slightly up on the £7,067 withdrawn in the same period of last year. In fact, it’s actually down on 2021 and even the same period in 2019, before the pandemic, when the average withdrawal was at £8,297.
Sarah Coles, head of personal finance at Hargreaves Lansdown, pointed out that the average person took 2.36 payments over that three-month period from their pension, which suggested that large numbers of pension savers are “taking sensible, regular payments, rather than raiding their pensions in a panic”.
Pension savers are increasing contributions
The data also shows that pension contributions have increased, demonstrating that younger savers are continuing to put money aside for their later years.
A total of £11.9 billion of pension contributions were made in the year ending 2022, up from £11.7 billion the previous year.
There has also been an increase in contributions from the self-employed, with £2.3 billion paid into private pensions by those who work for themselves, up from £2 billion in the year before.
These higher contribution levels led to a jump in the amount of tax relief paid on our pension saving. A total of £69 billion in tax relief was paid, up from £67 billion in 2020/21. Of that sum, more than half (54%) went to higher rate taxpayers, with 40% going to basic rate taxpayers. Additional rate taxpayers accounted for just 6% of the tax relief paid.
In the past there have been concerns that higher earners are not claiming the pension tax relief which they are entitled to.
The end of lifetime allowance charges
Earlier this year the government announced changes to the allowances pension savers are subject to. The annual allowance, which caps how much you can save in a year without being charged, rose from £40,000 to £60,000, while the lifetime allowance was scrapped altogether.
However, as these figures cover the period before these changes were made, they highlight what an earner they have been in the past for the taxman. Annual allowance charges for the 2021/22 tax year for example hit £335 million, a sharp jump from the £202 million paid in the year before. Similarly lifetime allowance charges increased sharply from £391 million to £497 million over the same period.
Alice Guy said that these higher charge figures represent a “cruel twist” for savers, many of whom will have been “absolutely gutted” to have triggered such sizeable penalties just a matter of months before the rules changed.
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