28 September 2022
If you are covering the HMRC pension statistics this morning, which show a 23% increase in the number of people accessing their pension amid the cost of living crisis, please see the following comment from Jon Greer, head of retirement policy at Quilter:
"New pension statistics show that people are raiding their pensions amid the cost-of-living crisis. Figures out from the government this morning show that Between 1 April and 30 June 2022, £3.6 billion was ripped out of private pensions by 508,000 individuals. The average withdrawal was £7,000 in this period and is 23% higher compared to the same quarter in 2021 when £2.9 billion was withdrawn.
"Comparatively, before the cost-of-living crisis had come into full swing between 1 January 2022 and 31 March 2022, £2.3 billion of taxable payments were withdrawn from pensions by 403,000 individuals with the average taxable withdrawal being £5,700 in this period. The total value of taxable payments withdrawn flexibly from pensions since pension freedoms was introduced in 2015, has exceeded £59 billion.
"These figures indicate that as a result of soaring energy and food prices people are having to dip into their retirement funds to help stay afloat. While the state pension will rise with inflation going forward and help offset some of the costs it will be far from enough for people to rely on. As such, this big jump is likely just the start and more and more people may need to access their pension to pay for their spiralling bills as we enter a fiscally difficult time.
"Although over the last few years the number of flexible withdrawals from pensions has risen this represents a significant spike. During the pandemic we didn’t see such big increases as the government support schemes did their job and prevented a mass exodus of savings. However, we are now facing a very different beast as energy bills and food costs are set to soar along with mortgage payments and pensioners may well feel that they need more each month to get by.
"If you do feel that you have no other option than to take income flexibly now, you must be aware that this could also limit your ability to save again in the future. The Money Purchase Annual Allowance will cap future contributions at just £4,000 per year, rather than the normal £40,000. So if you take income now but then later return to work, you might not be able to make full pension contributions to rebuild you pension savings. There is a risk of a scarring effect on people’s savings, caused by them being forced to tap into their retirement pot early, but then also being prevented from recovering that funding gap when their finances are in better shape. We believe the Chancellor should relax the MPAA triggers for at least the current tax year in order to avoid this double-whammy for people forced to use pension cash in the crisis.
"According to the ABI, someone in their 50s on average earnings would only have to pay an extra £151 a month into their pension (above the minimum required) to exceed the MPAA. Paying more than £4,000 a year would mean having tax relief clawed back. This effectively punishes people trying to do the right thing and severely limits their ability to save for retirement in the future. It’s high time this inflexible rule was scrapped in favour of a general anti-abuse approach similar to that taken for existing pension recycling rules, which gets to the crux of HM Treasury’s concerns.
"Taking proper account of the impact on the longevity of your pension pot is also paramount. Accessing your pension a few years earlier than planned can trigger a ripple effect into the future that means you may need to re-adjust your future plans depending on what actions you take now. While the cost of living crisis may force your hand it’s important to tread carefully when accessing your pension."
