Pension withdrawals could hit new highs in the coming months, as a result of the cost of living crisis and inflation, according to AJ Bell.
The provider is urging savers to “stop and think” before accessing their retirement pot during “peak withdrawals season” in April, May and June.
AJ Bell said the start of the tax year is traditionally peak pension withdrawal season for people with DC pensions to take advantage of a fresh set of income tax allowances.
However, with UK adults facing higher living costs as a result of high inflation, AJ Bell believes withdrawals could surge.
Tom Selby, director of public policy at AJ Bell, said: “This time last year saw a sharp spike in withdrawals, with a record £4bn of taxable payments taken from pensions flexibly by 567,000 people during the quarter, at an average of £7,100 per withdrawal.
“This represented a 17 per cent increase in the value of withdrawals compared to the same quarter in 2022, with surging inflation undoubtedly a significant factor as many savers were forced to turn to their pension pots to make ends meet.
“While inflation is now cooling, the pain of two years of rising prices is still being felt by households, with millions braced for significant spikes in costs as they prepare to remortgage in a world of much higher interest rates.
"Given these ongoing pressures on Brits’ finances, we are likely to see another surge in pension access over the next three months.”
Reasons to think before accessing pot
AJ Bell is urging savers to think before accessing their pot early or hiking withdrawals because this increases the risk of running out of money in retirement.
“Put simply, if you raid your pension pot early, you’ll either need to keep your withdrawals very low, potentially harming your quality of life later in retirement; find other sources of income; or face up to the prospect of your pot running out sooner than planned and being left relying solely on the state pension,” it added.
AJ Bell warned early access could see someone miss out on investment growth while someone withdrawing taxable income from their retirement pot for the first time will impact their ability to save tax efficiently in the future.
It said: “Taking even £1 of taxable income from your pension flexibly will trigger the money purchase annual allowance (MPAA), potentially significantly reducing the amount you can save in a pension tax efficiently.
“Chancellor Jeremy Hunt at least reduced this cliff edge by increasing the MPAA from £4,000 to £10,000, but that is still a lot less than the £60,000 annual allowance. If you trigger the MPAA you will lose the ability to ‘carry forward’ unused pensions allowances from up to three previous tax years.
“If you are struggling to make ends meet and your pension is the only asset available to support you, consider just taking your tax-free cash (or a portion of your tax-free cash) as this won’t trigger the MPAA.”
