Britons use pension freedom rules to tap into retirement pots at record rate

Britons are looting pension pots to cope with cost of living pressures, new HMRC figures show.

Between April and June, a record amount was withdrawn through pension freedom rules, with more than half a million people looting pension funds during this period.

In total there were 1.25 million withdrawals worth a total of £3.57 billion – a 23 percent increase compared to the same period in 2021.

This is an increase of over £1 billion recorded compared to the first three months of the year.

It is the highest figure in a three-month period since the rules were introduced in 2015.

They give people aged 55 and over more access to defined contribution pension pots, with the first 25 percent being tax-free.

This can be used as a pure cash withdrawal, in other retirement products or a combination of both, while people can choose to continue working.

The record high admissions come as the cost of living has risen to a 40-year high.

Between March and June, CPI inflation rose from 7 percent to 9.4 percent, with the cost of energy, fuel and food in particular rising at an alarming rate.

The new figures from HMRC suggest that an increasing number of people are turning to their pension pots to cope with rising costs and there are concerns that some could jeopardize their pensions as a result.

Steve Webb, a partner at LCP said: ‘These dramatic numbers are the clearest sign yet that people are turning to retirement to help them with the cost of living.

‘In the spring, pensions and benefits only rose by about 3 percent when inflation was already around 9 percent.

‘For those who have used up their savings, it seems that retirement is their next point of contact.

“It would be worrying if the only way people could cope with the cost of living crisis was by destroying their standard of living when they retire.”

Will we see a new record amount being withdrawn this year?

As of April 2015, the total value of taxable payments flexibly withdrawn from pensions has exceeded £59 billion.

However, last year there was a noticeable spike in withdrawals – at the same time, inflation started to rise.

There was a further spike between April and June this year – coincidentally when inflation reached its 40-year high.

The number of people taking early retirement and the average amount withdrawn also appears to be increasing.

403,000 people took flexibility out of their pensions between January and March this year, compared to 508,000 between April and June

The average taxable withdrawal rose from £5,700 between January and March to £7,000 between April and June this year.

The Bank of England expects inflation to peak at 11 per cent in October and experts believe Britons can continue tapping into their retirement assets to cope with the rising cost of living.

Helen Morrissey, senior pensions and pension analyst at Hargreaves Lansdown said: ‘People have been cautious when it comes to accessing their pensions under Freedom and Choice, but this data shows the crisis is starting to bite into the cost of living with an increase of the number of people accessing their pension in recent months.

“We’ve seen the number of people accessing their pensions steadily increase over the years, but the shift between April and June this year was particularly sharp with more than half a million people taking the plunge.”

“We could see this increase further in the coming months as rising food and energy prices put pressure on retirees’ incomes.”

There are also concerns that people taking taxable income from retirement for the first time will also severely limit their ability to rebuild their pension pot.

Tom Selby, head of pension policy at AJ Bell says: ‘If you take even £1 of taxable income flexibly from your pension, the Annual Cash Purchase Allowance (MPAA) will be activated, permanently reducing your annual allowance from £40,000 to just £ 4,000.

‘You also lose the opportunity to ‘transfer’ unused allowances for a maximum of three years in the current tax year.’

In addition, HMRC treats lump-sum retirement benefits as if they were a permanent increase in income and applies an emergency tax code.

As a result, savers have been overburdened to the tune of £892 million since 2015, analysis by AJ Bell shows.

You can get a tax refund within 30 days if you fill out a form. Otherwise you will have to wait until the end of the tax year.