The number of individuals over the age of 65 making lump sum withdrawals from their pension pots has hit a record high following the introduction of pension freedoms in 2015.
Data from HM Revenue & Customs, published by Salisbury House Wealth yesterday (September 16), revealed that the number of over 65s withdrawing from their pensions increased by 38 per cent to 529,400 in June 2018/19, up from 384,000 in June 2017/18.
The number of lump sum pension withdrawals made by over 65s is increasing at a faster pace than that of under 65s, which have risen 23 per cent in the last year from 496,200 in 2017/18 to 611,700 in 2018/19.
According to the adviser firm, these increases are predominantly driven by individuals using pension freedoms rights.
Under pension freedoms introduced in 2015, individuals over the age of 55 are able to withdraw funds from pension pots, whereas previously they would have had to wait until they retired.
Savers are also no longer directed towards an annuity and may access their pot as a lump sum, buy a product that pays an income, keep it invested or can choose a combination of all three.
Ricky Chan, director and chartered financial planner at IFS Wealth & Pensions, said: “The data underlines the impact pensions freedoms are having on how retirees choose to access their pension pot.
“Many over 65s could still be working, whether that is full time, part-time or on a voluntary basis, so the ability for them to flexibly access their pensions via pension commencement lump sums or ad-hoc income withdrawals allows them to maintain their lifestyle without committing to an annuity just yet; some may use this as an opportunity to pay down mortgages or other debts.”
Individuals can withdraw up to 25 per cent of their pension tax free, after which withdrawals are subject to income tax at a rate of 20 per cent, 40 per cent or 45 per cent, depending on which tax bracket the saver falls into.
The tax-free amount can be taken as a single lump sum or as smaller regular sums, where 25% per cent of each withdrawal is tax-free.
But Salisbury House Wealth has warned that pension withdrawals can come at a cost.
The firm said: “If individuals remove more than their tax-free cash amount from a defined contribution pension scheme, the value that can be paid in with the benefit of tax relief [after that] falls to £4,000 per year.
“This is down from £40,000 a year or 100% of your taxable salary, therefore individuals may miss out on tens of thousands of pounds in tax relief.”
David Bebb, chartered financial planner at Pannells Financial Planning, said that this is something he is all too familiar with.
Mr Bebb said: “I was introduced to a higher rate taxpayer who decided to “cash-in” his pension on an execution-only basis using the uncrystallised funds pension lump sum method.
“In isolation this is horrendously tax inefficient as he lost around 30 per cent of the fund value to HMRC. However, it gets worse.
“This event triggered the money purchase annual allowance; thereby reducing his annual allowance from £40,000 to just £4,000. As someone who is still working it can be penalising, as your employer pension contributions count towards this annual allowance and an annual allowance charge falls on the individual, not your employer.
“Whilst the range of options of accessing your pension have never been better, there are pitfalls to pension freedoms which must be navigated.”
Another driver of the increase in pension withdrawals from over 65s is the growth in bank of Gran and Grandad.
More grandparents are helping their grandchildren get on the property ladder, by funding the deposit through their pension.
The number of over 75s making pension withdrawals saw one of the largest increases of any demographic rising 44 per cent to 69,1000 in 2018/19 up from 48,100 in 2017/18.
Salisbury House Wealth also found that volatile stock markets, coupled with government gilts at historically low yields, have encouraged more over 65s to either switch investments into cash in order to de-risk or to take out the funds.
The firm warned that individuals using drawdown need to be aware of the effects that placing money in cash will have on the value of funds over time.
Tim Holmes, managing director at Salisbury House Wealth, said: “Investors who are at retirement age may want to remove risk from their pension but it will depend on how they intend to access their pension assets in retirement as to what action they ultimately should or should not take. Their adviser will be able to discuss this and guide them at this time.
“If pensioners are doing this on the basis of sensible advice and avoid putting that money in inappropriate investments then this new flexibility can be really helpful.
“However, people must be cautious not to de-risk their portfolio too far before or into their retirement as it may negatively impact the growth of their funds.”
amy.austin@ft.com
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