Lump sum withdrawals from pensions have shot up by 94% as savers’ incomes are hit by the economic effects of Covid-19, says the Association of British Insurers (ABI).
There was an initial pause of withdrawals at the start of the pandemic, but the ABI says that in a comparison between September and April of this year, when the first strict lockdown was imposed, those withdrawing all of their savings in a single lump sum rose by 94%.
The number of those taking just a tax-free lump sum rather than emptying their pot rose by 55%. At the same time the number of people buying annuities rose by 41%.
The insurers suggest the rise in numbers has been caused by a combination of factors. It includes people returning to withdrawing after pausing earlier in the year because the stock market was so volatile and others needing money because of a change of circumstances.
Their report says many households have suffered income shocks under lockdown from job losses, pay cuts or furloughing.
Pensions expert Ian Browne says: “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.”
Under the pension freedoms introduced in 2015, savers over the age of 55 were given the options to take cash from their pots in a variety of ways.
They are free to cash in some or all of their savings at one go or buy an income policy called an annuity which guarantees monthly payouts for the rest of their lives.
The first 25% of withdrawals are tax free but anything further is subject to income tax.
Despite the recent increases, overall withdrawals remain below 2019 levels.
The ABI believes many savers remain cautious and are resisting any urge to raid their savings in the face of future financial uncertainty and urges anyone thinking of taking money out to seek independent financial advice – either from the government’s Pension Wise service or a regulated financial advisor – as well as talking to their provider about the options available.
Says Ian Browne: “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.”
His colleague Rob Yuille, head of long term savings policy, offers a number of tips for what to do if you are considering any withdrawal:
- 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?
- 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?
- 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.
- . 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?
- 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.