1st February 2021
New figures from HMRC show 360,000 people withdrew from their defined contribution (DC) pensions throughout October, November and December 2020. This is a 10% increase on the same period last year from 327,000, and a 4% rise compared to the previous three months. This is not the usual seasonal pattern as typically there is a slight drop in the numbers of individuals withdrawing during this period. HMRC state that this change in behaviour may be attributable to the impact of the Covid-19 pandemic.
It also found that in total £2.4 billion was withdrawn from DC pensions through this period. This represents a 6% increase year-on-year from £2.2 billion withdrawn throughout the same months in 2019.
Jonathan Watts-Lay, Director, WEALTH at work, comments; “It can be really tempting for those aged over 55 to access their defined contribution pension early if they have an urgent need for cash due to redundancy or a reduction in their income. However, there are significant risks involved when taking money from a pension and there may be better options available, so it is crucial that pension scheme members understand the implications first.”
He adds; “One of the main things they need to make sure is that they don’t end up paying more tax than they were expecting. Usually only the first 25% of a pension is tax free; the remaining 75% is taxed as earned income. Members could end up paying tax of 40%, instead of the 20% they may have been expecting to pay if the amount withdrawn jumps them into the next tax bracket.”
He explains; “Also, and perhaps more importantly, whilst members may really need the cash at the moment, they will also need money in retirement. There are limits on how much can be paid into a pension after a withdrawal has been made, making it more difficult for those who want to try to replace the money withdrawn in the future.”
It is important for members to consider all their options if they are struggling to make ends meet, such as the government-backed mortgage holiday and debt repayment deferrals, or using alternative savings to replace any lost income, and weigh up the best option for themselves. Learning how to budget and manage debt on a reduced income is crucial during these uncertain times.”
He concludes; “Ultimately, employers and Trustees have a key role in stepping up and ensuring that members can make informed choices. Many are now putting robust processes in place including providing access to financial education, guidance and regulated financial advice, to ensure their members receive the right support at the right time.”
Links to websites external to those of Wealth at Work Limited (also referred to here as 'we', 'us', 'our' 'ours') will usually contain some content that is not written by us and over which we have no authority and which we do not endorse. Any hyperlinks or references to third party websites are provided for your convenience only. Therefore please be aware that we do not accept responsibility for the content of any third party site(s) except content that is specifically attributed to us or our employees and where we are the authors of such content. Further, we accept no responsibility for any malicious codes (or their consequences) of external sites. Nor do we endorse any organisation or publication to which we link and make no representations about them.