UK savers continue raiding pensions as inflation has its effect

According to official UK statistics, cash withdrawals from Pension pots have risen by almost one fifth. This has raised concerns that retirement savings are being squeezed in the current cost of living crisis.

According to the latest data by HM Revenue & Customs, between April and June of this year, 567,000 individuals withdrawn £4bn in taxable pension payments from retirement pots.

The previous quarter, 519,000 people made withdrawals totaling £3.4bn. The average withdrawal from April to June was £7100, almost a fifth (17%) higher than withdrawals during the same quarter of 2022.

Alice Guy, the head of Interactive Investor’s pensions and savings division, said: “It is extremely alarming that more people are withdrawing money from their pensions at higher rates.”

“Pensions are the result of years of hard work and dedication. It’s concerning that so many people have to tap into their savings at rates that could be unsustainable.”

Advisors said that householders would likely be relying on their retirement funds to tide them over in a time of high inflation.

This could be due to the fact that energy prices are on the rise and that food costs have also risen, making pensioners feel like they need to spend more money each month to survive, said Jon Greer. He is head of retirement policies at Quilter.

While the state pension is expected to rise in line with wage increases and offset some costs, the amount will not be enough for the people who rely on it.

Data this week revealed that a large number of people are exceeding the annual allowance for saving, which exposes them to tax on pensions.

At the time of data collection, the standard annual allowance was £40,000. The tax relief was not available for pension savings above this threshold. Instead, clawback tax rates at the individual’s marginal tax rate were applied.

Data showed that 53,330 people had breached the AA during the tax year 2021-22 — an increase of 21,5% compared to 43,870 in the previous year.

In 2021-22, the total value of contributions that exceeded the AA and were reported through self-assessment was £1.2bn — an increase from £814mn the previous year.

Pension schemes reported 11,660 charges for lifetime allowances in 2021-22 — a significant increase from the 8,820 charges of the previous tax period.

In his spring Budget, Jeremy Hunt raised the annual allowance from £60,000 to £60,000. He also abolished LTA.

This shows that before Jeremy Hunt raised the AA from £60,000 to £60,000, and the LTA was effectively abolished in April 2023, the number of pensioners falling below both thresholds had increased rapidly. It is possible this was due to the low level of advice taken in these potentially complicated areas.

In the case of LTA, which has been frozen since the year 2021, a saver may also be penalized for their investment performance. This particular danger is now gone with the effective abolishment of the LTA.

Grimston said that it was yet to be seen if the “loosening” of Treasury’s pension taxation policy would continue in the face of a “changing political landscape”.