Since pension freedoms were introduced in April 2015, it’s been interesting to review official figures each quarter and better understand how savers are making use of the new rules.
The ability to withdraw unlimited amounts from a pension pot, subject of course to tax charges, was originally met with warnings of unsustainable financial behaviour and squandering the proceeds on unnecessary purchases.
Thankfully, the reality of pension freedoms has been quite different, with the vast majority of those making flexible withdrawals doing so at sensible and sustainable levels.
The latest set of figures released by HM Revenue & Customs shows that the number of flexible pension withdrawals made in the final quarter of last year reached a new record level.
This data is in respect of flexible payments out of pension pots, including full or partial withdrawals, flexible drawdown or buying a flexible annuity.
A total of 628,000 payments were made in the quarter.
The number of flexible pension payments has been steadily increasing since the second quarter of 2015, when it stood at 121,000. The number of individuals who have made flexible withdrawals since pension freedoms were introduced in April 2015 now exceeds one million, with a total of 5.49 million individual withdrawals between them.
Despite a rising number of pension withdrawals since pension freedoms were introduced, the average amount withdrawn each time has been declining.
Average withdrawals reached a record low of £7,197 in the final quarter of last year, down from £7,597 in the previous quarter.
This suggests that savers are not stripping out the value of their pension pots, but instead withdrawing the money to cover essential living costs.
A total of £23.6bn has now been withdrawn flexibly from pension pots since April 2015, no doubt providing a lot of tax revenue for the Treasury.
The figures suggest that the popularity of pension freedoms continues to rise and savers are showing some restraint when it comes to the amounts they withdraw.
One factor influencing this restraint could be the global equity market falls witnessed in the final quarter of last year.
When investment markets and the value of your pension pots are falling, you’re likely to be a little more cautious about the amounts you withdraw.
Commenting on the figures, Alistair McQueen, Head of Savings & Retirement at Aviva said: “The pension freedoms show no sign of losing their popularity. More than one million savers have embraced their new freedoms since 2015, and a record £7.83bn of taxable payments were withdrawn in 2018.
“There is however no evidence of an uncontrolled “dash-for-cash”, as was feared by some when the freedoms were introduced. The 2018 figure of £7.83bn needs to be seen in the context of a total private pension wealth in the UK of approximately £5,000bn.
“Withdrawal payments have also consistently averaged less than £4,000 since summer 2017, showing little evidence of savers rushing to buy Lamborghinis!
“These freedoms are attractive to younger savers too, with Aviva research finding that one third (33%) of under-35s believe this flexible access encourages them to put more money towards their pension.
“The freedoms are a good news story for pensions and pension savers."
Before making a flexible withdrawal from your pension, it’s important to carefully consider all of your options.
You also need to think about the sustainability and tax consequences of making withdrawals.
Seeking professional advice before starting flexible pension withdrawals is important to make sure the money will last for as long as your retirement does.