People accessing their pension as a flexible income has increased by 56% since the first lockdown. This increase is due to people withdrawing after holding off when stock markets were volatile. However withdrawals of all types still remain below 2019 levels. With businesses now shut due to the third lockdown, the prospect of further high numbers of withdrawals is possible.
Here’s some figures to show the scale of the withdrawal of funds:
There is a combination of factors that has led to this increase in withdrawals; one being some people returning to withdraw after pausing earlier in the year due to stock market volatility, and some people needing the money after a change in circumstances.
Laura Stewart-Smith, Workplace Savings Manager at Aviva said “Money may have been withdrawn to offset falls in income. Covid has, and will continue to, change lives and, in some cases, trigger early retirement or a decision to access funds early”.
There are some tax implications to taking money out of a pot early. You can take 25% tax-free, but the rest will be taxed as your income for the year. You might then find yourself paying tax at 20%, 40% and possibly 45% on these withdrawals as you are pushed into a higher tax bracket.
Moreover an emergency tax may be applied to withdrawals. This means you will have to claim the tax back. This is a problem especially if you are budgeting and need an exact amount in your bank account.
At present, you can pay up to £40,000, or all of your salary, into a pension and get tax relief on the contributions. Taking money out early may affect tax reliefs on future contributions. If you withdraw more than 25%, the tax relief reduces.
Financial scams are on the rise and older people are among the most vulnerable, especially those who have just taken money from their pension. With many facing financial uncertainty as a result of the pandemic, they are especially susceptible to scammers who target them with fake investment schemes.
ABI’s Head of Long-Term Savings, Rob Yuille’s top tips on things to consider when withdrawing money from your pension: