Pension withdrawals by those aged 55+ surged to £12.9bn in 2022-23, a sharp increase from £11.2bn in the previous year and £9.3bn in 2020-21, according to statistics from HMRC.
The most recent private pension statistics from HMRC also reveal that average taxable withdrawals rose by 18 per cent in Q1 2023 to £6,600 per person, for a total of £3.4bn, or 17 per cent more than in Q1 2022, taken out by 519,000 people in 1.2 million payments.
Additionally, contributions reached record highs in 2021-22, totalling £11.9bn, up from £11.7bn the previous year. The value of contributions from self-employed workers rose from £2bn to £2.3bn as well.
Due to Covid-19’s effects on working and retiring, 7.5 million more people are now contributing to personal pensions. Contributors who are self-employed went up from 330,000 to 340,000, a small gain.
Costs associated with National Insurance relief and pension income tax remained at £48.3bn. The amount of contributions above the Annual Allowance increased from 43,870 to 53,330, totalling £1.2bn. The total cost of the Lifetime Allowance charges grew to 11,660, or £497mn.
PensionBee director of public affairs Becky O’Connor says: “People are increasingly benefiting from pensions either by choice or because salary increases are resulting in a rise in contributions. However, the apparent increase in the number and value of withdrawals is concerning – the risk is that people take more out to cover the rising cost of living but don’t leave enough in their pensions to get through their whole retirement.
“It’s also a little disappointing not to see a bigger rise in the number of self-employed people opting to pay into a pension and a shame to see so many being caught out by charges for going over their allowances in previous years.
“The Annual Allowance has now increased from £40,000 to £60,000 and the Lifetime Allowance has been abolished, so the number of people being hit by these charges should drop significantly in future data. Nevertheless, as wages rise, it’s possible that more people could be dragged over the Annual Allowance – particularly those who are paying in more than the minimum, paying bonuses or inheritance money into a pension or those with particularly generous employer schemes.”
Quilter head of retirement policy Jon Greer says: “The recent pension figures coming out of HMRC provide a window into why Hunt felt that it was necessary to drastically change the annual allowance threshold and look to abolish the lifetime allowance altogether.
“The figures show that our highly complex tax system in 2021/22 was catching an increasing number of people out as annual allowance and lifetime allowance charges soared. This would have likely been even more pronounced in future data sets due to the various frozen allowances had Hunt not made considerable changes to the pension landscape in the Spring Budget.
“Annual allowance charges, which had been plaguing the public sector and NHS doctors in particular, causing doctors to reduce their hours spiked by nearly 10,000 from 43,870 individuals in 2020 to 2021 to 53,330 in 2021/22. As a result, the total value of contributions reported as exceeding the AA increased from £814 million to £1.2bn in 2021/22. Raising the threshold from £40,000 to £60,000, and increasing the minimum tapered annual allowance for high earners, should help to drastically reduce this figure in years to come and help to relieve some of the pressure from the mounting tax issues doctors were facing in respect to the annual allowance.
“Similarly, the fairly radical decision to abolish the LTA has more context when viewing this year’s dataset, as 11,660 LTA charges were reported increasing from 8,820 LTA charges reported in 2020 to 2021. It is important to note that these figures only tell part of the story – they do not include lifetime allowance charges incurred on payment of death benefits which are not published.
“It is worth bearing in mind that the Lifetime Allowance tax charge was originally only supposed to impact 5,000 individuals yet due to reductions in the lifetime allowance and the freezing of the allowance it was now penalising far more than that each year.
“However, with a general election on the horizon, it is anyone’s guess whether the abolition of the lifetime allowance will be a permanent fixture. This throws up some financial planning problems for people.
“The abolition of the LTA while positive for many, does add some complexity to the system, particularly around when to take your tax-free cash. The threshold for the maximum amount of tax-free cash that can be withdrawn from a pension was frozen in cash terms by the Chancellor at £268,275, so this needs to be considered if your pension pot is at or above the old LTA threshold. Not to mention the risk that the decision to abolish the lifetime allowance could be overturned by future governments. Professional financial advice is therefore key to navigating these complex decisions as other products such as ISAs and onshore bonds come to the fore with respect to retirement planning.
“Elsewhere, while the total number of individual contributions to personal pensions has increased from £11.7bn to £11.9bn this has largely been buoyed by an increase in the number of individual contributions made by the self-employed which increased from £2bn to £2.3bn. The value of contributions made to personal pensions dropped for the first time in four years marginally. At the beginning of the cost of living crisis, many worried that the financial strain could trigger an exodus from workplace schemes as people opted out of auto-enrolment. This data shows that this fear has not materialised but it has dropped a small amount and with increased financial pressure it could drop further.
“Also included in the data is the most recent set of flexible payments from pensions statistics. The data set shows that the total value of taxable payments withdrawn flexibly from pensions since flexibility changes were introduced in 2015 has exceeded £72.2 billion. There have been some quite large increases in the value of payments withdrawn in the first two quarters of 2023. Between 1 January 2023 and 31 March 2023, there was a 18 per cent increase in the value of payments withdrawn in this quarter compared to the same quarter in 2022. Meanwhile, there was a 17 per cent increase in the value of payments withdrawn between 1 April and 30 June 2023.
“This may be down to increased energy bills and food prices soaring with pensioners feeling that they need more each month just to get by. While the state pension will rise with wage growth going forward and help offset some of the costs it will be far from enough for people to rely on.”
