The Covid-19 pandemic has affected every part of our lives from our health to our finances in a significant way. A Bank of England survey shows significant declines in household income and spending due to Covid.
Many people are financially worse off than they were before the pandemic. An estimated one in 10 working adults across the country stopped or cut back on saving for retirement over the past year.
We have also seen a growing trend of people who raid their pension pots to tide them over. HMRC figures show that the number of people using flexible pension withdrawals rose by 23 % in the first quarter of last year compared to the same period in 2019.
The Financial Conduct Authority found that 42% of those it surveyed raided pensions at unsustainable levels. Its data reveals those savers with smaller pension pots (between £10,000 and £100,000) were using high withdrawal rates.
So more than two thirds of these savers (67%) used an 8% withdrawal rate that is significantly higher than savers with funds valued at more than £100,000.
Savers in this category accessed their pots at a withdrawal rate of between 2 and 4 percent.
The Association of British Insurers compared the months of April and September 2020 to asses how people accessed their pensions. It found that people withdrawing all their pensions in one lump sum increased by 94 per cent. The body also observed a 55 per cent increase in those only taking tax-free lump sums.
Some advisers are now sounding the alarm in response to the shocking data from across the UK that indicates pensions withdrawals are on the rise.
Emergency fix
Mark Parkinson, head of the wealth management team at Tait Walker, warns the short-term withdrawals could do significant long-term damage.
“We are seeing two problems here: firstly, people have understandably stopped saving because money is tight. Secondly, and more seriously, they have taken funds from their pension pots to solve short-term money worries,” he says.
“A squeeze on finances, redundancies and furlough have meant many things have been put on the back burner. The government is desperate for people to start spending again to help revive the economy, but we would also urge people to consider saving as well.
“Most of all, we would strongly recommend people don’t dip into their pension pots prematurely. It can be really tempting to do so when you see your statement – or perhaps you have been approached by a company offering to help you unlock that cash – but you will potentially lose huge amounts of your savings to the tax man.
“If you are thinking of withdrawing from your pension pot early, we’d urge you only to do so if you are fully aware of the implications. The cash you have saved is tax-free while it remains in your pension pot, but it becomes taxable the second it’s withdrawn.”
Head of retirement policy at the Association of British Insurers Rob Yuille adds: “There is potentially most detrimental when customers take their entire pension as a lump sum, especially if it is simply left in cash savings.”
Writing on the trade body’s blog on Monday, Yuille explains “A single lump sum is still the most common way that pensions are accessed, despite most of the regulatory focus being on non-advised drawdown; it’s important not to ignore this issue and to consider the customer journey that leads to this choice.”
Parkinson offers advice for people who have made a withdrawal from their pension.
“It’s important that people take a long-term view of their pension and any break in payments should be kept to a minimum to avoid building pensions savings gaps and resulting in a negative impact on retirement plans.”
He says employers could do more to help staff to better appreciate exactly how much they will need to save in order to recuperate losses.
“Auto-enrolment has worked well to help more people start to save for their future, but in many cases it’s unlikely to be enough. People generally over-estimate the extent of state support, and under-estimate how much of their own money they will need in order to live comfortably during retirement. We’d like to see more employers encourage staff to save even more if they can,” he adds.
Beefing up guidance
Will the Money and Pension Service be able to help prevent bad decisions with the take up of more effective guidance?
Yuille says the regulators should give more support to defined contribution savers who dipped into their pension to help them avoid making poor decisions.
“We’d like to see new forms of advice and more people getting help earlier from Pension Wise and MoneyHelper more widely.”
Another huge concern for the sector is the number of people taking regulated advice when entering drawdown. But that is an even longer term challenge and is a subject for another day.
