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, WEALTH at work, a specialist provider of financial education and guidance in the workplace supported by regulated financial advice for individuals, comments on the findings.
Watts-Lay said, “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 they are facing redundancy or reduced household income. However, there are significant risks if you take money out of your pension without seeking appropriate financial guidance first.”
He added, “One of the main things to ensure is that you 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 your pension, you could end up with a big tax bill, especially if you jump into a higher income tax bracket.”
Watts-Lay stressed, “Also, rushing to take money from your pension can also make you 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.
“However perhaps most importantly, your pension is there to pay for your retirement and it is crucial that you understand the implications of taking money out of your pension early. Whilst you may really need the cash at the moment, you will also need money in your retirement. It is important to consider all your options if you 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 you.”
Watts-Lay added, “Many people will need financial support including financial education, guidance and regulated financial advice to help them understand their financial situation. It’s always worth asking what help is available through the workplace as many employers are now putting support in place for their employees.”