Pension freedom withdrawals hit record £2.3bn in Q2

A record £2.3bn was withdrawn from pensions under Freedom and Choice in the second quarter of this year, according to HMRC, writes James Phillips.

Making it work: Getting the most out of pensions freedom

A record £2.3bn was withdrawn from pensions under Freedom and Choice in the second quarter of this year, according to HM Revenue & Customs (HMRC).

The period also saw the highest number of people access their pensions via the largest amount of withdrawals in a quarter since the freedoms were introduced in 2015.

Over a quarter of a million people, across 574,000 payments, withdrew an average of £8,600 between April and June. The figure is up 34% on the previous quarter when withdrawals amounted to £1.7bn.

Barnett Waddingham senior consultant Malcolm McLean said the figures demonstrate “the continuing popularity” of the freedoms.

“What is less clear, and rather more worrying, is how many people are accessing their pension pots earlier and more extensively than they might have done and without the benefit of advice or guidance,” he said. “They could be storing up trouble for themselves in later life with increasing poverty in advance old age.”

He warned that some savers could risk breaching the money purchase annual allowance (MPAA), which restricts tax-free payments into defined contribution (DC) schemes to £4,000 a year once the saver has accessed their pot.

“There are warnings as well as good news about the popularity of the pension freedoms in these figures, which the government must take care to continue to monitor and take heed of if they are not doing so already.”

While the figure is the highest of all quarters since the flexibilities were introduced, reporting for Q2 2015 to Q1 2016 was not compulsory and the figures in this period may understate the actual withdrawals.

In total, £19.7bn has now been withdrawn via the freedoms since April 2015.

Just Group communications director Stephen Lowe reiterated previous concerns that the figures provide “an incomplete picture of what’s going on”, namely as they only cover taxable money withdrawn from pensions and so do not include tax-free lump sums.

“While today’s figures reveal the average size of a flexible withdrawal is £8,595, which looks modest, we need to remember that small pension pots can make all the difference to raise people’s monthly living standards,” he added.

Research from Prudential, published earlier this month, found that around 10% of this year’s retirees planned to take their entire pension pot as a lump sum, despite the tax implications.