Pension withdrawals top £30bn

Since pension freedoms were introduced by George Osborne in 2015, there is no doubt drawing down a pension pot is becoming the most popular method by which a person accesses their pension fund after age 55.

It’s interesting that the amount of withdraws is rising as the statistics show savers withdrew £2.4bn between July and September 2019, up 21% over the same period in 2018. However, average amounts withdrawn has fallen. Moreover, 327,000 people made 778,000 withdrawals with the data showing regular withdrawals becoming the norm as the number of withdrawals is rising to an average of 2.38.1

Do your staff understand their pension withdrawal options?

When working with employers to provide governance and financial education support, we find almost all staff know about the option to take 25% of the pension fund as a tax free lump sum and this is broadly well understood. However, when we discuss the ability to then use the balance fund to withdraw an income in stages, and the tax implications of doing so, this is less well understood.

The fact is that:

  • anyone over 55 wanting to make withdrawals, and
  • if that amount falls within the personal allowance, and
  • there is no other income

could mean the income is also tax free. If they understand this, a member of the scheme may become very interested in how to manage their pension account.

Example Pension fund on retirement £48,000

Phased withdrawal over three years

  Year 1 Year 2 Year 3
Fund at the 6th April £48,000 £32,000 £16,000
Withdrawal from the fund £16,000 £16,000 £16,000
25% tax free cash £4,000 £4,000 £4,000
Balance subject to income tax £12,000 £12,000 £12,000
Other taxable income £0 £0 £0
Personal Allowance £12,500 £12,500 £12,500
Tax Due £0 £0 £0
Fund at the end of tax year £32,000 £16,000 £0
Amount withdrawn tax free £16,000 £16,000 £16,000
Cumulative withdrawn tax free £16,000 £32,000 £48,000

No other income subject to income tax
No growth in assets
Personal Allowance remains unchanged

As the above example shows, there is potential for the flexibility to withdraw not just 25% of the pension fund accumulated tax free, but also a large amount of the remaining fund, simply by keeping withdrawals within the realm of the personal allowance. Imagine a couple in the household using this method, there could be a significant amount of income that can be withdrawn without tax. 

Pension have always been attractive because of the tax relief they receive, employer contributions and their tax efficient investment returns. The ability to manage the withdrawals tax efficiently is slowly becoming understood. Supporting employees to improve how the go about withdrawing their hard earned pension savings will help a business manage retiring employees better, including succession planning.


1 HMRC https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/841958/Pension_Flexibility_Statistics_Oct_2019.pdf

This is a marketing communication FP19.907