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

Britons are looting pensions to cope with cost-of-living pressures, new figures from HMRC indicate.

Between April and June, a record amount was withdrawn through pension freedom rules, with more than half a million people raiding retirement funds during this period.

In total, 1.25 million withdrawals were made for a collective value of £3.57 billion, an increase of 23 per cent compared to the same period in 2021.

This is an increase of over £1bn withdrawn compared to the first three months of the year.

Desperate times, desperate measures: Pension withdrawals have surged as the cost-of-living crisis forces Britons to dip into their superannuation funds

Desperate times, desperate measures: Pension withdrawals have surged as the cost-of-living crisis forces Britons to dip into their superannuation funds

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

They give people greater access to defined contribution pension pools starting at age 55, with the first 25 percent tax-free.

This can be used as a pure cash withdrawal, put into other retirement income products, or a combination of the two, while individuals may choose to continue working.

The retirement record comes at a time when living costs have risen to a 40-year high.

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

New figures from HMRC suggest that an increasing number of people are dipping into their pension funds to meet rising costs, and as a result there are concerns that some may be putting their retirement at risk.

Steve Webb, Partner at LCP, 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 the spring, pensions and benefits only increased by about 3 percent when inflation was already hovering around 9 percent.

‘For those who have exhausted their cash savings, it looks like pension is your next port of call.

“It would be concerning if the only way people could deal with the cost-of-living crisis was by devastating their standard of living in retirement.”

Will we see a new record amount withdrawn this year?

Since April 2015, the total value of taxable payments flexibly withdrawn from pensions has exceeded £59bn.

However, there was a notable increase in withdrawals last year, at the same time that inflation started to rise.

There was a further increase between April and June of this year, coincidentally when inflation hit a 40-year high.

The number of people drawing on their pension early and the average amount withdrawn each time also appear to be increasing.

403,000 people relaxed their pensions between January and March of 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 value of flexible-access taxable pensions and the number of people accessing these payments has gradually increased since 2017. But it reached an all-time high this year.

The value of flexible-access taxable pensions and the number of people accessing these payments has gradually increased since 2017. But it reached an all-time high this year.

The value of flexible-access taxable pensions and the number of people accessing these payments has gradually increased since 2017. But it reached an all-time high this year.

The Bank of England expects inflation to peak at 11 percent in October and experts believe Britons can continue to tap into their pension wealth to cope with rising costs of living.

Helen Morrissey, senior pension and retirement analyst at Hargreaves Lansdown, said: “People have been cautious when it comes to accessing their pensions under Freedom and Choice, but these data show that the cost of living crisis is starting to hit hard. an increase in the number of people. accessing his pension in recent months.

“We have seen the number of people accessing their pensions rise steadily over the years, but the change between April and June this year has been especially stark, with more than half a million people taking the plunge.”

“We could see this rise even more in the coming months as food and energy prices soar putting pressure on retiree income.”

There is also concern that people earning taxable income from their pension for the first time will also be severely restricted in their ability to rebuild their retirement fund.

Tom Selby, head of retirement policy at AJ Bell, says: “Taking even £1 of your taxable pension income flexibly will trigger the Money Purchase Annual Allowance (MPAA), permanently reducing your annual allowance from £40,000 to just £4,000.

“You will also lose the ability to ‘carry over’ up to three years of unused appropriations in the current fiscal year.”

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

As a result, savers have been overtaxed to the tune of £892m since 2015, AJ Bell’s analysis shows.

You can get a tax refund within 30 days by filling out a form. Otherwise, you must wait until the end of the tax year.

How can people access their pension without the MPAA being activated?

Tom Selby, head of retirement policy at AJ Bell responds:

1) Just take your cash tax free

While flexible access to your taxable pension income will trigger the MPAA, withdrawing your cash tax-free will not.

It’s possible to ‘partially crystallize’ your fund so that you only take out the tax-free cash you need, and the rest stays in your fund and can grow tax-efficiently.

2) Withdraw a small boat

If your fund is worth £10,000 or less, you can withdraw the item flexibly and tax-free without triggering the MPAA.

You must extinguish the entire fund in order not to trigger the MPAA. You can make up to three small jackpot withdrawals worth £10,000 or less in your lifetime.

3) Limited reduction

The limited drawdown is no longer available, but some savers who were on a limited drawdown prior to April 2015 have remained on it.

As long as the withdrawals made through limited withdrawals do not exceed the maximum earnings limit (150 percent of the GAD annuity rate), the MPAA will not kick in.

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