Savers ‘sensible’ during Covid as pension withdrawals remain flat

Savers ‘sensible’ during Covid as pension withdrawals remain flat

Savers have been sensible throughout a year of Covid and refrained from raiding their pensions, with HM Revenue and Customs seeing withdrawal levels dip in 2021.

Data published by HMRC today (April 30) showed £2.6bn was withdrawn from pensions flexibly in the first quarter of 2021, up from £2.5bn in the same period last year.

The total value of flexible withdrawals from pensions since pension freedoms were introduced in 2015 has now exceeded £45bn.

The average amount withdrawn was £6,800 in the quarter, a 4 per cent decrease from £7,100 in Q1 2020.

The number of people accessing their pension year-on-year increased by 10 per cent to 383,000.

According to HMRC, withdrawal numbers typically rise in the last quarter of the tax year and peak in the first quarter of the new tax year. 

It said this seasonality could be due to some individuals accessing their pension over a number of years and using the flexibility to withdraw funds at the beginning of the tax year.

Nathan Long, senior analyst at Hargreaves Lansdown, said: “Calmer and more positive markets at the start of this year encouraged more pension savers to dip into their pots.

“The pandemic had sent jitters through the markets during 2020, spooking some retirees, who put the brakes on their pension payments, so the average withdrawal hit record lows. 

“In early 2021, despite the market recovery, they were still wary of taking too much. The average was higher than at any other stage since the onset of the pandemic, but down 4 per cent in a year and low by historic standards.”

Meanwhile, Steven Cameron, pensions director at Aegon, has warned savers to stay sensible and not rush to dip into their pots later this year.

He said: “Looking ahead, markets are much healthier that they were a year ago, with the FTSE 100 closing 18 per cent higher on 31 March 2021 than a year earlier. And, after a year of reduced opportunity to spend, many retirees could be amongst the pandemic’s ‘accidental savers’, finding their bank balances also looking healthy. 

“Historically, we have seen a peak in how much people withdraw from their pension in Q2, but this year we’d urge over 55s to think carefully before dashing to their pension for cash. 

“Generally, it makes sense to take out only what you need from your pension, leaving the balance to grow tax free, so people should consider living off any ‘accidental’ savings in their bank account first.”

Emergency tax

In addition, the tax authority has paid back more than £23m in overpaid tax to individuals who have withdrawn money from their pensions during the first quarter of 2021.

With the introduction of pension freedom rules, which came into force in 2015, savers have been able to take income from defined contribution plans in any way they like.

But any withdrawals above the 25 per cent tax free amount are taxable at an individual's marginal rate of income tax.