Flexible pension withdrawals increased to £8.3bn for the period of April – December 2021, an increase of 19 per cent compared to the same period in 2020, HMRC has revealed.

The total value of flexible withdrawals since pension freedoms were introduced in 2015 has now exceeded £53bn.

A total of 648,000 people flexibly withdrew from pensions between April and December 2021, with the average amount withdrawn being £12,800.

HMRC’s publication also revealed that gross pension tax relief in 2019/20 is projected to be £41.3bn, up from £38.2bn in 2018/19.

It noted that there had been “strong growth” in contributions to both occupational and personal pension schemes, which it said was expected to largely be due to auto-enrolment.

Furthermore, there has been “substantial” growth in employer contributions to public sector defined benefit schemes over the same period, following increases to contribution rates to many public sector schemes from April 2019.

In 2019/20, 42,350 taxpayers reported pension contributions exceeding their annual allowance, while the total value of contributions exceeding the annual allowance increased from £829m in 2018/19 to £949m in 2019/20.

The total value of annual allowance charges also rose, from £210m in 2018/19 to £253m across 21,420 charges in 2019/20.

There were 8,510 lifetime allowance changes reported by schemes in 2019/20, with a total value of £342m, a 21 per cent increase from the £283m reported in 2018/19.

Commenting on the figures, Hargreaves Landsdown senior pensions and retirement analyst, Helen Morrissey, said: “We’re set for a record year of pension withdrawals as the cost-of-living bites, and we dipped in for a fifth more cash in the first part of the tax year. But this isn’t necessarily anything to worry about just yet because we’re not draining our pots dry.

“We saw a significant increase in the amount being withdrawn from pensions between April and December 2021 with a whopping £8.3bn being accessed. By the time the final quarter’s data comes through, this should be by far the biggest year for pension withdrawals.

“This could be down to several factors. The pandemic no doubt put pressure on people’s finances and there is also the chance that soaring inflation is forcing more retirees to tap into their pensions to meet the spiralling cost of living.

“While the amount of money being accessed has gone up, this is not necessarily a cause for concern. There’s no indication retirees are draining their funds – the average amount taken was £12,800 so far this tax year. This continues a downwards trend in the average amount being accessed though we will see if the ongoing cost of living crisis alters this in the coming months.

“Appetite for pension flexibilities remains undimmed and the ability to access their pensions in this way is likely to be welcomed by older people in these challenging times.”

Quilter pensions expert, Ian Browne, added: "There are lots of good news stories to be taken from the recent pension figures coming out of HMRC this morning. First is that a huge £31.3bn was contributed to personal pensions in 2019 to 2020 up 12 per cent on the previous year.

"This really shows that pre-pandemic the public was starting to understand the need to start prioritising saving for retirement as the state pension alone is unlikely to come anywhere close to providing the kind of retirement lifestyle many aspire to.

"However, what these figures will look like post pandemic is yet to be seen and as we now as we enter a cost-of-living crisis people may understandably prioritise money in their pocket today over ploughing money into their pension.

"Similarly, although the positive impact of auto-enrolment does seem to be plateauing, it achieved a significant spike in the number of people contributing to a personal pension over the past few years. There has been no year on year increase with around 9.4 million people contributing in 2019 to 2020, but this is up by a huge 1.2 million people from 2012/13.

"However, the bad news is that the figures also show that our highly complex tax system is catching an increasing number of people out as annual allowance and lifetime allowance charges begin to soar. This is likely to get even more pronounced in future data sets due to the various frozen allowances announced at the last budget..

"Annual allowance (AA) charges, which have been plaguing the public sector and NHS doctors in particular, causing doctors to reduce their hours is spiking. In 2019 to 2020, 42,350 taxpayers reported pension contributions exceeding their AA through self-assessment. The total value of contributions reported as exceeding the AA was £949m in 2019 to 2020 which has increased from £819m in 2018 to 2019.

Similarly, in 2019 to 2020, 8,510 LTA charges were reported with a total value of £342 million. This is a 21 per cent increase from £283m in 2018 to 2019. It is worth bearing in mind that the lifetime allowance tax charge was originally only supposed to impact 5,000 individuals yet is now penalising far more than that each year. The lifetime allowance is now a problem for affluent people as well as those who could be considered high net worth.

"The government should be doing everything it can at present to encourage savers to put money away for their retirement. While auto-enrolment has been a very successful step in the right direction, it’s important that the highly complex rules around the annual allowance and lifetime allowance don’t hamper the good work the policy has done. These rules require an intricate knowledge of the UK’s pension landscape to understand and therefore time and time again catch people out."

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