The total value of taxable payments withdrawn flexibly from pensions since pension freedoms were introduced in April 2015 has surpassed £72.2bn, data from HMRC has revealed.

The update showed that £12.9bn in taxable payments was withdrawn from pensions flexibly in 2022 to 2023, up from £11.2bn in 2021 to 2022 and £9.3bn in 2020 to 2021.

In particular, £3.4bn of taxable payments was withdrawn from pensions flexibly by 519,000 individuals across 1.2 million payments in Q1 2023, while £4bn of taxable payments was withdrawn from pensions flexibly by 567,000 individuals across 1.3 million payments in Q2.

Commenting on the figures, Canada Life retirement income director, Nick Flynn, suggested that "the floodgates have well and truly opened as record amounts are being stripped from pensions".

"While there is no need hit the panic button, I hope these people have a backup plan to be able to generate a wage in retirement," he continued.

“The current cost-of-living crisis may be driving some of this behaviour, and no doubt pent up demand following the pandemic will also be behind these record withdrawals."

There was some progress around pension saving habits though, as the report revealed that £11.9bn of individual contributions were made to personal pensions in 2021 to 2022, up from £11.7bn in 2020 to 2021.

In addition to this, £2.3bn of individual contributions were made by self-employed members in 2021 to 2022, up from £2bn in 2020 to 2021.

The number of members making individual contributions to a personal pension also increased from 7 million in 2020 to 2021 to 7.5 million in 2021 to 2022, while the number of self-employed savers making contributions to a personal pension rose to 340,000 from 330,000.

However, the number of savers exceeding their personalised Annual Allowance (AA) also rose, as 53,330 individuals reported pension contributions exceeding their personalised AA through SA, compared to 43,870 in 2020 to 2021.

The total value of contributions reported via self assessment (SA) as exceeding the AA was £1.2bn in 2021 to 2022. This has increased from £814m in 2020 to 2021.

Lifetime Allowance (LTA) charges also rose, as 11,660 LTA charges were reported by schemes through AFT returns in 2021 to 2022, up from 8,820 LTA charges reported in 2020 to 2021.

The total value of LTA charges reported by schemes in 2021 to 2022 was £497m, marking an increase from £391m in 2020 to 2021.

The updated suggested that the increase in the total value of LTA charges may be due to the removal of the annual link of the LTA to the Consumer Prices Index increase in 2021 to 2022, which maintained the standard LTA at £1,073,100.

LCP partner, Steve Webb, highlighted these figures as demonstration of why the Chancellor felt forced to act in his March 2023 Budget.

He stated: "Between 2020/21 and 2021/22 the number of people paying tax penalties for exceeding the annual or lifetime limits on pension tax relief went up sharply, generating hundreds of millions of pounds extra for the Treasury.

"One major group affected was senior NHS doctors who could face big tax bills as another year of service in the NHS added significantly to the value of their pensions.

"Both Annual and Lifetime Allowance limits have been hitting a wider and wider group of individuals which has added great complexity to the system of pension tax relief and the 2023 Budget changes will therefore make matters a great deal simpler for the widening group that might have been affected”.

This was echoed by Quilter head of retirement policy, Jon Greer, who stated: "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.

"However, with a general election on the horizon it is anyone’s guess whether the abolition of the life-time allowance will be a permanent fixture. This throws up some financial planning problems for people."

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