Steep living costs drive rise in numbers accessing pensions
New data from the Financial Conduct Authority shows that there was an 18% surge in pension pots being accessed for the first time
Inflation has returned to a 40-year high, with growing numbers dipping into their retirement savings to help cover soaring living costs.
Rising food and energy prices helped push the Consumer Prices Index measure of inflation to 10.1% in September. This is more than five times the government’s 2% inflation target, so it’s little wonder that many people feel they have no option but to plunder their pensions to make ends meet.
New data from the Financial Conduct Authority shows that there was an 18% surge in pension pots being accessed for the first time in 2021/22 compared to 2020/21, and that the overall value of money being withdrawn from pensions (whether for the first time or not) increased 22% to £45.64 billion from £37.43 billion.
Separate government figures show that between April and June alone this year, £3.6 billion of taxable payments were withdrawn from pensions flexibly by 508,000 individuals, a 23% increase compared to the same period last year. The average taxable withdrawal was £7,000 in this period, compared to £5,800 in the same three months of 2021.
Stephen Lowe, group communications director at retirement specialist Just Group, said “The second quarter of the year typically sees the highest volume of money withdrawn from pensions, but we have never seen more than £3 billion accessed, let alone more than £3.5 billion. It suggests that the cost-of-living crisis could have started to impact people’s behaviours when accessing their pensions.
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“The underlying worry is that people may be taking a chunk out of their pension for the first time to tide them through the cost-of-living crisis but are unaware of the long-term consequences.”
Here are some of the things you need to consider if you’re planning to take money out of your pension to cover rising living costs.
1) It’ll be harder to increase your savings in future
As soon as you start taking an income out of your pension, you’ll usually trigger what’s known as the Money Purchase Annual Allowance, which restricts the amount you can pay into your pension and benefit from tax relief to £4,000 a year, down from the normal Annual Allowance of £40,000. This means you won’t be able to make any big payments into your pension pot to make up for what you’ve withdrawn.
Jon Greer, head of retirement policy at Quilter said: According to the Association of British Insurers, someone in their 50s on average earnings would only have to pay an extra £151 a month into their pension (above the minimum required) to exceed the MPAA. Paying more than £4,000 a year would mean having tax relief clawed back. This effectively punishes people trying to do the right thing and severely limits their ability to save for retirement in the future.”
2) You might end up with an unexpected tax bill
Taking a big chunk out of your pension could leave you facing a potentially hefty tax bill, as any amount taken over your tax-free cash is added to their other taxable income, meaning many will pay a high rate of income tax on some or all of it.
Sean McCann, chartered financial planner at NFU Mutual, said: “Cashing in pension pots of more than £50,000 will push many into the 40% or 45% income tax band and leave them with a large tax bill they weren’t expecting. In many cases the tax bill can be reduced by phasing withdrawals over a number of years.”
3) You may not have enough to live on when you retire
If you take money out of your pension now, you’re less likely to end up with the vast sums needed to ensure a comfortable retirement.
Analysis by consultancy Broadstone shows that even if the State Pension is uprated in line with September’s inflation figure of 10.1% next April, pension savers would still need to build up a pot of around £550,000 to ensure a comfortable standard of living in retirement. The Pension and Lifetime Savings Association’s Retirement Living Standards show that £33,600 annual income is needed to achieve a ‘comfortable’ standard of living. That leaves a £23,000 gap to fill even if the State Pension is uprated in line with inflation – requiring a total pot of £550,000.
Gary Smith, director of financial planning at leading UK wealth manager Evelyn Partners, said: “When investment values are lower than they were a year ago, by ceasing contributions you are missing out on potentially good-value investments that could bear fruit over the long term. While by cashing in, even if it is just the tax-free 25% lump sum, you are crystallising recent losses – and the pension pot might never recover from this raid.”