New figures from HMRC show 347,000 people withdrew from their pensions throughout July, August and September 2020. This is a 6% increase on the same figures from last year, and a 2% rise compared to the previous three months, which is not the usual seasonal pattern.
HMRC’s report detailed: “The number of individuals making withdrawals typically peaks in April, May and June, the beginning of the tax year, before dropping in July, August and September. However this year, withdrawals have increased in July, August and September. This change in behaviour may be attributable to the impact of the Covid-19 pandemic.”
Jonathan Watts-Lay, Director at 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 immediate need for cash. This can be especially true right now if employees are facing redundancy or reduced household income. However, there are significant risks if they take money out of their pension without seeking appropriate financial guidance first.”
He adds; “One of the main things for employees to ensure is that they don’t end up paying unnecessary tax. Usually only the first 25% of a pension is tax free; the remaining 75% is taxed as earned income. By taking cash from their pension, they could end up with a big tax bill, especially if it takes them into a higher income tax bracket.”
Watts-Lay stresses; “Also, rushing to take money from a pension can also make individuals incredibly vulnerable to scams, which can have a devastating impact. In July, Action Fraud reported that victims of coronavirus-related scams had lost over £11million, with it previously stating that pension scams had been among the most common type of fraud during the crisis. Victims of pension scams can be left approaching retirement with a significantly reduced income and in some cases, entire life savings can be lost.”
He explains; “However perhaps most importantly, employees should realise that a pension is there to pay for retirement and it is crucial that they understand the implications of taking money out of their pension early. Whilst employees may really need the cash at the moment, they will also need money in their retirement. It is important for them to consider all their options if they are struggling to make ends meet, such as the government-backed recently extended mortgage holiday and debt repayment deferrals, or using alternative savings to replace any lost income, and weigh up the best option for them.”
Watts-Lay adds; “Many employees will need financial support including financial education, guidance and regulated financial advice to help them understand their financial situation. Leading employers are now putting robust processes in place to ensure that this support is available throughout the workplace, leading to better outcomes for all.”