PensionsSep 29 2022

Cost of living bites as people start ‘raiding’ their pensions

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Cost of living bites as people start ‘raiding’ their pensions
Justin Tallis/Getty Images

The data showed a 23 per cent increase in the number of people accessing their pension for the second quarter of this year compared to the same period last year, with £3.6bn removed by 508,000 individuals. 

The average withdrawal for this period was £7,000, and while experts have said we cannot be certain what has driven this behaviour, AJ Bell head of retirement policy, Tom Selby said the most likely culprit causing the "raiding" of pensions is inflation.

“[The] numbers provide clear evidence that squeezed savers are being forced to turn to their pension pots to make ends meet,” Selby said. 

“With millions of families struggling to pay the bills at the moment, for many turning to their hard-earned pensions will feel like the only option."

“There will also inevitably be lots of parents or grandparents who are taking some income from their pensions to help younger generations get by,” he added.

The same period last year (April-June) saw £2.9bn withdrawn, while the first quarter of this year, before the cost of living crisis really began to bite, saw £2.3bn of taxable payments taken out.

In total across the 2021/22 tax year, £10.6bn of flexible withdrawals were made by savers, up from £9.6bn in 2019/20.

Although the number of flexible withdrawals from pensions has risen over the past few years, the change this quarter represents a significant spike. 

Former pensions minister, now partner at LCP, Steve Webb said: “These dramatic figures are the clearest sign yet that people are turning to their pensions to help them with the cost of living crisis. In Spring of this year pensions and benefits only rose by around 3 per cent when inflation was already around 9 per cent. 

"For those who have run down cash savings, it seems that the pension is their next port of call. It would be worrying if the only way people could cope with the cost of living crisis was by ravaging their living standards in retirement”.

Quilter’s head of retirement policy, Jon Greer pointed out that during the pandemic there was not such big increases as the government support schemes "did their job and prevented a mass exodus of savings". 

“However, we are now facing a very different beast as energy bills and food costs are set to soar along with mortgage payments and pensioners may well feel that they need more each month to get by," Greer said.

Selby warned that anyone accessing their pension or increasing withdrawals as a result of inflation “need to consider the long-term impact of this decision”.

“Accessing your pension early, or upping your withdrawals, will put the sustainability of your retirement plan under strain. This may be a secondary consideration for people truly struggling as bills rise, but it’s crucial not to stick your head in the sand or make big decisions like this blindly,” he said. 

Selby also pointed out that anyone taking taxable income from their pension for the first time will have their ability to rebuild their retirement pot “severely restricted”. 

But Hargreaves Lansdown, senior pensions and retirement analyst, Helen Morrissey said there will be a further increase in withdrawals over the coming months as soaring food and energy prices put pressure on pensioner incomes. 

Calls to scrap MPAA

Even taking £1 of taxable income flexibly from a pension will trigger the money purchase annual allowance (MPAA), which will permanently reduce an individual’s annual allowance from £40,000 to £4,000 and they will also lose the ability to ‘carry forward’ up to three years of unused allowances in the current tax year. 

“Given the severity of the current crisis and the impact it is having on behaviour, there is a strong case for increasing the MPAA back to £10,000 at the very least,” Selby argued.

He also called on the government to scrap the MPAA altogether to help simplify pension tax rules. 

Quilter’s Greer agreed that MPAA rules need to be scrapped, but called for them to be at least relaxed for the current tax year in order to avoid the “double-whammy for people forced to use pension cash in the crisis”.

Greer proposed that a general “anti-abuse” approach be adapted instead, similar to that taken for existing pension recycling rules, “which gets to the crux of HM Treasury’s concerns".

The figures also showed the value of lifetime allowance charges increased by more than 10 per cent. This is despite the number of charges decreasing slightly. 

Hargreaves Lansdown's Morrissey explained this is because more charges have been levied at the 55 per cent charged for lump sums rather than the 25 per cent levied on income. 

“The shift to lump sums could be indicative of people taking money ad-hoc to fund higher living costs or to help loved ones who are struggling,” she said.

Tax relief

The data also showed the cost of pension tax relief which hit an estimated £48.2bn in 2020-21. 

Of this, 42 per cent of income tax relief was levied at the basic rate while 6 per cent was at the additional rate. 

“We will see shifts in this in the coming years after last Friday’s mini-Budget brought forward the income tax drop from 20 per cent to 19 per cent and additional rate income tax was abolished from April,” Morrissey said. 

“This means basic rate tax-payers will get less tax relief on contributions going forward and we can expect to see additional rate taxpayers make a beeline to boost their contributions in the coming months to benefit from the 45 per cent tax relief while they still can.”

Elsewhere, the figures showed the estimated net cost of pension income tax and national insurance contribution relief is estimated to be £48.2bn in 2020 to 2021, up from £44.5bn in 2019 to 2020.

They also showed £11.7bn of individual contributions were made to personal pensions in 2020 to 2021, up from £10.6bn in 2019 to 2020.

Meanwhile, £2bn of individual contributions were made by self-employed members in 2020 to 2021, up from £1.7bn in 2019 to 2020.

jane.matthews@ft.com