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Home Finance Cost of living bites as more people dip into their pensions

Cost of living bites as more people dip into their pensions

by Staff GBAF Publications Ltd


  • The total value of taxable payments withdrawn flexibly from pensions since 2015 has exceeded £59 billion.
  • Between 1 April and 30 June 2022, £3.6 billion of taxable payments was withdrawn from pensions flexibly by 508,000 individuals.
  • The estimated net cost of pension income tax and NICs relief is estimated to be £48.2 billion in 2020 to 2021, up from £44.5 billion in 2019 to 2020.
  • In 2020 to 2021 42% of income tax relief on total contributions is estimated to be relieved at the basic rate, 52% at the higher rate and 6% at the additional rate.
  • £11.7 billion of individual contributions were made to personal pensions in 2020 to 2021, up from £10.6 billion in 2019 to 2020.
  • £2.0 billion of individual contributions were made by self-employed members in 2020 to 2021, up from £1.7 billion in 2019 to 2020.
  • In 2020 to 2021, 8,610 LTA charges were reported by schemes. This is a 0.5% decrease from the previous year. However, the total value of charges increased by 11%

Today HMRC issued Private Pension data Private pension statistics commentary: September 2022 – GOV.UK (www.gov.uk)

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown:

“People have been prudent when it comes to accessing their pensions under Freedom and Choice but this data shows the cost of living crisis is starting to bite with a surge in the number of people accessing their pension in recent months. Average taxable withdrawals now top £7,000.

We’ve seen the numbers of people accessing their pensions steadily increase over the years but the shift between April and June this year has been especially sharp with over half a million people taking the plunge.  We could see this increase yet further over the coming months as soaring food and energy prices put pressure on pensioner incomes.

We have also seen the value of lifetime allowance charges increase by more than 10%. This is despite the number of charges decreasing slightly. The reason behind this is because more charges have been levied at the 55% charged for lump sums rather than the 25% levied on income. The shift to lump sums could be indicative of people taking money ad-hoc to fund higher living costs or to help loved ones who are struggling.

Data issued yesterday shows a real appetite among older workers who left employment during the pandemic to return to the workplace with over half saying they would consider it. The social and wellbeing aspects of being in work will no doubt be important factors in people’s decision to return but there’s no doubt the current cost-of-living crisis will also be a major reason as people look to rebuild pensions they have had to access early or realise their well laid retirement plans have been undone by red hot inflation. However, these people will need to be wary of triggering the Money Purchase Annual Allowance if they have already accessed their pension as contributing more than £4,000 per year will see them incur a tax charge.

Pension tax relief

The data also shows the eye-watering cost of pension tax relief which hit an estimated £48.2bn in 2020-21. Of this, 42% of income tax relief was levied at the basic rate while 6% was at the additional rate. We will see shifts in this in the coming years after last Friday’s mini-budget brought forward the income tax drop from 20% to 19% and additional rate income tax was abolished from April. This means basic rate tax-payers will get less tax relief on contributions going forward and we can expect to see additional rate taxpayers make a beeline to boost their contributions in the coming months to benefit from the 45% tax relief while they still can. Carry forward, where you can use unused allowances from previous tax years will be utilised by this group to boost contributions further. We could also see more basic rate taxpayers look to save for retirement using a Lifetime ISA rather than a pension following Friday’s announcement as the government LISA bonus stacks up well when compared to 19% pension tax relief. For those not benefiting from an employer contribution, such as the self-employed it could be a good option.”