But savers accessing their pensions need to check the tax implications.
Savers withdrew £2.3 billion from their pensions in the first three months of the 2018/19 tax year alone, figures from HM Revenue & Customs reveal – a 50 per cent increase on withdrawals made during the first three months of pension freedoms three years ago.
HMRC has published a report which unveils just how much savers have taken out of their pension pots since the introduction of pension freedoms in 2015.
Between April and June around 264,000 people withdrew an average of £3,950 each from their pension pots – adding up to £2.3 billion. That compares with total withdrawals of £1.5 billion in the first three months that the freedoms were introduced, between April and June 2015.
Samantha Seaton, chief executive of Moneyhub, says: ‘Since the freedoms were introduced in 2015, there has been a steady increase both in the number of people releasing money from their pension early and the total value of these payments. We are beginning to get a clearer picture of how those approaching retirement are taking advantage of the flexibility.’
New rules introduced three years ago have given retirees greater freedom over how they access their retirement savings than ever before. Savers are now able to access their pension pot from age 55 and have the flexibility to make ad hoc withdrawals rather than having to use the entire amount to purchase an annuity.
Last year, some 1.4 million withdrawals totalling a hefty £6.5 billion were made by savers making use of the new rules.
Since the freedoms were launched, £20 billion has been withdrawn by those approaching retirement, as more than one million people have accessed their pension savings.
Tom Selby, senior analyst at AJ Bell, says: ‘The good news is that average withdrawal amounts are not spiralling out of control. In fact, while the average withdrawal is almost £1,000 higher than the first three months of 2017, it is around £700 lower than it was a year ago.
‘It’s hard to tell whether such withdrawals are sustainable without a broader picture of individuals’ finances. Many people will have seen the value of their pot boosted by a bull run in the stock market in recent years – the real test of the reforms will come when markets fall.’
But Sean McCann, chartered financial planner at NFU Mutual, warns that those approaching retirement need to make sure their withdrawals do not affect their remaining savings.
He says savers accessing their retirement pots may inadvertently trigger a rule which restricts the amount they and their employers can contribute if they are still in employment.
He explains: ‘Many people will not be aware that taking money from their pension will restrict the amount they and their employer can pay into their pension to a maximum of £4,000 each tax year. People who are still working are particularly at risk of missing out on valuable employer contributions.
From age 55, most personal pensions allow you to take a quarter of the pension pot tax-free with the rest subject to income tax. But taking even a penny of the taxable amount will restrict any future pension savings.
McCann adds: ‘The contribution limit is just one of a number of tax pitfalls that will be catching some people unaware as they withdraw their pension savings. Just because you can make flexible withdrawals from a pension, it doesn’t mean it’s always the best thing for your money.’
People accessing their cash also need to ensure they are not paying more tax than they need to. Retirees have already paid hundreds of millions of pounds in unnecessary tax as a result of withdrawal money from their pension pots.
Seaton says: ‘What is concerning is that at retirement, there seems to be a significant lack of education and attention from product and service providers.’
Steve Webb, director of policy at Royal London, adds: ‘The key challenge is to make sure that more people take advice and guidance when deciding how to access their pension savings, so that they do so in a sustainable way that meets their objectives.’