Data published by HMRC last week (October 30) showed the average amount withdrawn per individual throughout July, August and September 2020 was £6,700, a 7 per cent decrease from the £7,200 seen during the same months in 2019.
A total £2.3bn was withdrawn from pensions flexibly in the third quarter of 2020, down from £2.8bn in the same period last year.
Since April 2016, average withdrawals have been falling steadily with peaks usually seen in April, May and June.
However this trend has changed this year, which HMRC said could be linked to the impact of Covid-19.
The number of people accessing their pension increased by 6 per cent year-on-year to 347,000 , and by 2 per cent on the previous quarter.
Again this went against normal trends as the number of savers making withdrawals normally peaks in Q2 as it coincides with the beginning of the new tax year.
The total value of flexible withdrawals from pensions since pension freedoms were introduced in 2015 has now exceeded £37bn.
Stephen Lowe, group communications director at Just Group, said it was positive that savers have stayed cautious and not raided their pots in response to the pandemic.
Mr Lowe said: “It’s positive that people do not appear to have panicked and started emptying their retirement funds in great numbers. But these figures must be treated very cautiously because they don’t cover people who are just accessing tax-free cash or who are emptying pensions under ‘small pot’ rules.
“We would urge those who are struggling financially to first check what benefits may be available to them and to use the free, impartial and independent guidance offered by Pension Wise to ensure they understand all the potential consequences of accessing pensions before retirement.”
Tom Selby, senior analyst at AJ Bell, said savers must continue to be engaged with their pensions in order to keep withdrawal levels sustainable for the future.
He said: “With markets largely recovering as we moved into Q3 2020 behaviour has returned to something approaching historic norms, albeit with nerves still evident in the reduced average withdrawal amount.
“For those taking an income while staying invested in drawdown – and particularly people in the early years of retirement - it remains absolutely critical they stay engaged and are prepared to adjust withdrawals if markets fall again in order to stay on a sustainable path.
“Ploughing on regardless is a highly risky strategy and could result in you running out of money early.”
Overpaid tax
The tax authority also revealed it had paid back almost £40m in overpaid tax to individuals who have withdrawn money from their pensions during the third quarter of 2020.
Almost 12,100 pension flexibility claims were processed from July to September with a total of £39.4m repaid to those who had been charged emergency tax when they took money from their pot.
Jessica List, pension technical manager at Curtis Banks, said: “It seems astounding that HMRC is processing 4,000 claims every month – and this only represents individuals who are reclaiming their money during the tax year, rather than waiting until the end.
“This isn’t a new problem, but each time figures like these are released it’s a reminder of how many people have this negative experience when accessing their pensions.”
Under the pension freedom rules people aged 55+ no longer have to purchase an annuity to access their pension income but can instead enter drawdown or take a cash amount.
However, any withdrawals above the 25 per cent tax free amount are taxable at an individual's marginal rate of income tax.
In some cases, the pension provider will already have a proper tax code for the beneficiary, if the saver has previously withdrawn money from their pension during the tax year.
But where the provider does not have the correct tax code for the individual – which is in the majority of cases - withdrawals are taxed using a higher rate emergency tax code, which routinely results in an excessive tax deduction that has to be reclaimed later.
Those that have been overtaxed can fill in one of three different forms - the P55, P53Z and P50Z - which allow people to claim back money from HMRC mid-way through the tax-year.
amy.austin@ft.com
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