DrawdownNov 2 2018

Pension freedom withdrawals hit £21.7bn

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Pension freedom withdrawals hit £21.7bn

Some £21.7bn have been withdrawn since the pension freedoms were introduced, in what is a further sign that savers are treating their pensions like a bank account.

Data published by HM Revenue & Customs today (2 November) showed almost 5 million withdrawals were made by more than 1.3 million people in the three and a half years after the rules came into force.

In the third quarter of 2018, 258,000 savers flexibly withdrew just less than £2bn from their pensions.

This comes as the latest official figures from the Treasury showed the taxman expects to receive an additional £400m from flexible pension withdrawals this year.

Andrew Tully, pensions technical director at Canada Life, warned of a tax trap for many, especially those starting to draw from their pension while still in work.

He said: "Typically smaller pensions are being fully withdrawn, while people with larger pensions are making multiple withdrawals in a tax year, suggesting they are treating their pension more like a bank account. 

"This combination of taking multiple withdrawals in a tax year at earlier ages, when people are still likely to be earning income from work, means many people are likely to be paying more tax than if they took withdrawals more gradually."

Mr Tully said the Treasury was "enjoying a tax bonanza, as predictions that paying income tax will be a natural brake on withdrawals hasn’t stopped people simply taking the money".

Tom Selby, senior analyst at AJ Bell, said today’s numbers showed most people were taking a pragmatic and controlled approach to how they manage their pension savings, with the average withdrawal per person being on a downwards trajectory. 

He noted there had been an initial rush for cash when the new rules came into effect in 2015, but since then the average withdrawal has plunged from £18,571 to the £7,597 seen in the third quarter of 2018.

But he warned people could be trapped in a higher tax rate when initially withdrawing funds.

Pension withdrawals above the maximum 25 per cent allowed tax free are levied at the marginal rate of tax of the taxpayer, but when the pension provider has insufficient information about the tax payer an emergency tax is levied, which can later be reclaimed.

This week it emerged HMRC has been forced to repay a record £38m in overpaid tax to such cases.

He said: "One of the real thorns in the new rules is the tax treatment applied to people making their first pension freedoms withdrawal. 

"In most cases an emergency tax rate will be applied to these withdrawals meaning people pay more tax than they should do. This can be reclaimed but it is a hassle and doesn’t help the fact that the withdrawal will be lower than the individual expected.

"Earlier this week HMRC reported that a record £38m of this overpaid tax was reclaimed by investors in Q3, yet it seems to have no intention of changing the rules."

maria.espadinha@ft.com