HMRC have published detailed statistics on the most recent data on personal pensions, pensions tax relief and flexible pension payments. Below, Steven Cameron, Pensions Director at Aegon, shares his thoughts.
- HMRC data shows number of members making individual contributions to a personal pension decreased to 6.8 million in 2020/2021, from 9.5 million the previous year
- Total pension income tax and NICs relief in 2020/2021 is estimated to be £67.3 billion, up from £63.1 billion in 2019/2020.
- In 2021/ 2022, £10.6 billion in taxable payments was withdrawn from pensions flexibly, an increase from £9.6 billion the previous year
- Between 1 April and 30 June 2022, £3.6 billion of taxable payments was withdrawn from pensions flexibly by 508,000 individuals, a 23% increase compared to the same quarter in 2021 when £2.9 billion was withdrawn.
Steven Cameron (pictured), Pensions Director at Aegon comments:
Covid pandemic impact on pension contributions
“HMRC’s data highlights just how damaging the Covid-19 pandemic was to the pension saving of those who found themselves out of work or struggling financially. Around 2.7 million people stopped contributions into their personal pension, and this could have been due to job loss or pausing contributions because of financial difficultly. However, the figures may exclude pension payments made as part of the Government’s furlough scheme.
“Despite numbers contributing to pensions falling, the average value of individual contributions increased by £600 from £1,100 to £1,700. This reinforces the disparities we saw during the pandemic between those who faced financial struggles because of job loss or reduced wages, and those who were able to build financial resilience and savings because of reduced day-to-day expenditures. The increase in the average value of pension contributions also suggests more of the lower earners stopped contributions compared to higher earners who typically have higher contributions.
“With the cost-of-living crisis impacting every household, we may see a further rise in the number of people pausing or reducing pension contributions as they struggle to meet rising costs. However, doing so means losing a valuable employer contribution so should be considered as a last resort.”
Cost of pension tax relief
“The figures shows the total amount individuals received in their pensions from ‘tax and National Insurance relief’ top-ups reached £67.3bn in 2020/21, up from £63.1 billion in 2019/20. This shows how tax efficient saving into a pension is. Of the total, 6% or around £4bn was paid to additional rate taxpayers who pay 45% tax.
“The Chancellor announced plans to scrap additional rate income tax which will mean from April 2023, the highest earners will no longer be able to receive relief at such a generous rate, which is likely to lead to a rush to pay in more to pensions before the end of the current tax year.”
Increase in pension withdrawals during pandemic and spike in Q2 2022
“The latest figures show the popularity of pension freedoms continues to grow rapidly. The number of individuals who accessed their pension flexibly and took a taxable payment reached a record high of 851,000 in the year from April 2021- March 2022. This is an increase of almost 200,000 individuals from the 654,000 in the previous year. There has also been a spike in the amount of money flexibly withdrawn from pension in Q2 2022, up 23% compared to the same quarter last year.
“Over 55s have huge flexibility over how to access their pension and this has been used by many to support finances during the pandemic and more recently as the cost of living crisis has bitten. However, those who dip into their pensions often don’t realise they are severely limited on how much they and their employer can pay into their pension in future. The yearly amount falls from £40,000 to just £4,000. These figures further reinforce the need for the £4,000 ‘Money Purchase Annual Allowance’ to be increased to at least £10,000 to allow those affected who re-join the workforce to rebuild their pension pots.”