Small defined contribution pensions are being emptied by thousands of savers each week under small pot lump sum rules, according to official statistics.
A Freedom of Information request by Just Group to HM Revenue & Customs revealed more than 4,200 people emptied their small pensions each week in 2018/19.
The FOI also showed £3.35bn was taken by 785,000 people between April 2015 when pension freedom was introduced and June 2019, equating to an average of £4,274 per person.
Withdrawals under the small pot rules are not seen as flexible payments so were excluded from the figures published by HMRC this week (October 30) which showed that £2.4bn was withdrawn flexibly in Q3 from individual's pensions and more than £30bn has been taken since 2015.
Under the rules savers over the age of 55 are allowed to take the whole of their DC pension as cash, as long as the value doesn’t exceed £30,000 in total, or £10,000 each across three pots. But the withdrawal could still be subject to a tax charge.
Stephen Lowe, group communications director at Just Group said this was the first time HMRC had revealed the "significant" scale of withdrawals from small pension pots.
Mr Lowe said: “For every two people taking a flexible payment, one person is cashing in a small pot – in many cases they will be the same person. For every £10 withdrawn in flexible payments, a further £1 is taken by emptying small pots.
“Generally people in the UK are ‘under-pensioned,’ in that they don’t have enough savings to provide the standard of living they aspire to in retirement so taking any pension money early is only likely to make life harder later.”
Mr Lowe explained if people did want to withdraw all their savings from a small pension pot, then using the small pot withdrawal was the best way to do it as it avoids breaching some allowances.
He said: “Small pot payments are not counted as flexible payments and therefore do not trigger the complex money purchase annual allowance limits which can restrict future pensions saving to £4,000 a year.”
The MPAA, introduced in 2015 to coincide with pension freedoms, is the amount a person who has already begun drawing on their pension can pay back into their retirement pot in a given year without incurring a tax charge.
The allowance was cut from £10,000 to £4,000 in April 2017, following an announcement in November 2016.
But Mr Lowe said people should think carefully before cashing in their pension pots.
He said: “It’s appealing to have cash in hand and perhaps people consider small pots as inconsequential so they feel it is a decision they can make themselves and are less likely to seek professional advice.
“It’s likely that flexible access to pensions will be good for some people but not so good for others who either take too much too soon, or too little too late.
“At the moment we can see snippets but not the whole picture so we don’t know who are the likely winners and losers.
"Without a more comprehensive understanding of what choices people are making with their pensions and other savings, we are flying blind which ultimately could put the whole future of the ‘pension freedom’ policy at risk.”
The FOI also found in 2018/19 £585m was taken in 179,000 payments from personal pensions, an average withdrawal of £3,268 each.
This compared with £205m taken in 103,000 payments from workplace pensions, an average of £1,990.
Overall, 219,000 people took one payment or more in 2018/19, valued at £790m or an average of £3,607.
Separately HMRC revealed this week that it had repaid £54.9m in pension tax during the third quarter of this year to 17,300 people.
This was a 15 per cent increase on the overpayments reported in Q2 2019 when the taxman repaid £46.8m to 17,200 individuals.
Overall, HMRC has given back some £536m to more than 220,000 taxpayers since the introduction of the pension freedoms.
amy.austin@ft.com
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