The number of pension savers withdrawing funds has skyrocketed after an initial pause at the start of the coronavirus pandemic, according to insurers.
Comparing September with April this year – when a strict lockdown was in place across the UK – the Association of British Insurers found those withdrawing all of their pensions in one lump sum increased by 94 per cent.
Meanwhile, those taking only tax-free lump sums increased by 55 per cent and the number of people buying annuities increased 41 per cent.
Money trend: The number of pension savers withdrawing funds has skyrocketed after an initial pause at the start of the coronavirus pandemic, according to insurers
The ABI suggested the increase in withdrawals is due to a combination of factors.
They include 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.
Many households have suffered income shocks from job losses, pay cuts and furloughing.
Commenting on the rise in people dipping into their pensions, Quilter retirement planning expert, Ian Browne, said: ‘Early on in this crisis many savers paused for thought, resulting in a sharp drop in pension withdrawals during the first lockdown.
‘But as job losses start to bite, many people will find themselves needing to dip into their savings.
‘For some people this will be a short-term fix while they search for a new role, while others that were already near pension age may bring forward their retirement date given the state of the job market.’
Pension freedom: Reforms introduced in 2015, give over-55s options to take money out in a variety of ways
The pension freedoms, which were introduced in 2015, give over-55s options to take money out in a variety of ways.
They can cash all or some of their savings in or buy a retirement income called an annuity.
Generally, 25 per cent of pots is tax-free and further withdrawals are subject to income tax.
What to consider before dipping into your pension pot
Rob Yuille, head of long-term savings policy at the ABI, offers his tips for what to consider if you are thinking of withdrawing money from your pension:
1. Familiarise yourself with the pensions freedoms so you know your options. You can do a lot more with your pension pot than previously. What risks are you willing to take?
2. Consider how much money you will need each month to maintain your lifestyle. Do you want to have annual holidays? Do you still have a mortgage to pay off? What other sources of income do you have and do you need your pension to keep up with inflation? Could you consider working for longer?
3. Think about costs later in your retirement. Care needs are not a subject we are comfortable thinking about but it is important to have conversations about it with your family, as well as powers of attorney, wills and inheritance.
4. Consider your health and life expectancy. We often vastly underestimate this but evidence shows we are mostly living longer, with a growing variation in healthy life expectancy. If you have a partner, do you need to provide for them financially after you die or are you relying on them?
5. Use sources of help. Use the Government’s Pension Tracing Service if you think you might have a lost pension pot, take a ‘midlife MOT’ from the Money and Pensions Service or your employer and make use of Pension Wise or a financial adviser.
The ABI said the number of people accessing their pensions as a flexible income increased by 56 per cent between April and September this year.
But it said withdrawals of all types remain below 2019 levels.
The ABI said data from August and September suggest withdrawal levels are getting closer to those seen in 2019.
But it added that many pension savers are still resisting the urge to raid their pension pots in the face of continued financial uncertainty.
It is urging anyone considering accessing their pension to seek impartial financial guidance from the Government-backed Pension Wise service, or regulated financial advice, and to ask their provider about their options.
Browne also recommends seeking advice before dipping into the pot. He says: ‘Taking proper account of the impact on the longevity of your pension pot is also paramount.
‘Accessing your pension a few years earlier than planned can trigger a ripple effect into the future that means you may need to re-adjust your future plans depending on what actions you take now.
‘Everyone should think about speaking to Pension Wise as a minimum before accessing their pension pot.
‘Even those with a high degree of confidence in their own financial capability could benefit from some impartial input, and the service is entirely free to use.
‘This should be considered the bare minimum, and for most people we would recommend speaking to a qualified financial adviser. They can help you get a handle on your long-term retirement finances and make sure you have a stable plan for the future.’