Recent figures published by HMRC which highlight a 6% increase in the number of individuals who withdrew money from their pensions between July and September this year, compared to the same period in 2019, are certainly worth further investigation.
The number of people withdrawing money from their pensions generally peaks each year in April, May and June before subsequently falling in the following three months.
The latest statistics from HMRC therefore indicate a divergence from the normal seasonal patterns and the Revenue has suggested this change in behaviour may be attributable to the impact of Covid-19.
If this recent spike has indeed been driven by the fallout from the global pandemic, it is vital that individuals aged 55 and over fully assess the implications of withdrawing money from their pension in order to address more immediate concerns. It is important for individuals to remember that their pension is primarily designed to provide them with an income throughout their retirement, which may last for two to three decades. This is a concept that investors can easily overlook, particularly since the advent of pensions freedoms in 2015, which provided much greater flexibilities as to how retirement funds can be accessed.
The potential long-term consequences of taking money from a pension either too early or too quickly can have a seriously detrimental effect on an individual’s financial security and wellbeing in retirement. And for those who think that the State Pension is sufficient to provide a decent standard of living once they attain their State Pension Age, they are in for a rude awakening. The State Pension provides little more than a basic level of subsistence, which is only likely to reduce in real terms in the years ahead.
It is therefore important that individuals take professional advice when they come to withdraw money from their pension to ensure they consider the tax consequences of doing so and any other alternative options available to them before making a major financial decision which they may live to regret.
Relevant considerations should also include factoring in the potential effects of sequencing risk on withdrawals (i.e. withdrawing money based on timing and a range of market volatility scenarios, including market crashes); lifetime cashflow modelling to identify the various sources of income available in retirement and the likely levels of expenditure each year throughout retirement; adopting a suitable risk profile and assessing capacity for loss, amongst other things.
At least the bright spot in the data appears to be that the average amount withdrawn per person between July and September 2020 was £6,700, falling by 7% from £7,200 during the same period in 2019. This is a positive indicator particularly when markets are volatile, as they are likely to remain so until a more permanent and sustainable solution can be found to controlling the spread of the virus, there is greater clarity over the outcome of the US Presidential Election, US-China trade relations and, of course, the Brexit trade negotiations. These are all challenges which even the most experienced investors will need to carefully navigate in the weeks and months ahead, let alone those who are facing such decisions for the very first time.
Paul Sweeny MSc. FPFS
Managing Director and Chartered Financial Planner
Sweeny Wealth Management Ltd
Mobile: 07980 851840
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment. Furthermore, the material should not be relied upon as containing sufficient information to support an investment decision. The value of investments, and the income from them, can go down as well as up and you may get back less than you invested.
Sweeny Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority (FCA No. 821005)