Rise in pension pot withdrawals

There has been a rise in retirees withdrawing cash from their pension pots and depositing the money into easy access account, new statistics show.

Data from HMRC shows that between April and June this year, £2.75 billion was withdrawn from pensions flexibly, with 760,000 payments made – a 21% increase on the same period the previous year when £2.27 billion was withdrawn. In addition to this, between April and June 2019, statistics from the Bank of England show £7.5 billion was deposited into accounts that are accessible without penalty, which includes easy access accounts. During this time, the money deposited into time restrictive accounts, including fixed rate bonds, was just £1.7 billion.

There are a number of reasons why retirees are withdrawing money from their pensions. One reason is that withdrawing a significant sum allows people to pay for big-ticket purchases, such as buying a car or going on a dream holiday, without needing to get into debt taking out a loan or using credit cards.

The current economic uncertainty could also be having an impact, as retirees want to be able to quickly access their funds in case of a rainy day. For those withdrawing money for this reason, depositing the money into an easy access account will provide a quick way of withdrawing funds when needed.

Another explanation as to why those in retirement are withdrawing money from their pensions is to provide themselves with an additional income, which can be achieved by choosing a savings account that pays interest monthly.

While easy access savings accounts are the best option for those wanting to be able to access their funds quickly, savers should be mindful that the best easy access deals can apply withdrawal restrictions or require savers to open the account online. Savers will also find that the market average rate of 0.64% is less than the Bank of England base rate, so there are still many accounts to avoid due to poor returns. Research from Moneyfactscompare.co.uk shows that while easy access savings rates are 0.15% higher now compared to August 2018, they are 0.01% lower than in February 2019. This would suggest that rates have peaked, and savers could be better off opening a savings account now to avoid rates falling further. To view the current top rates, visit our easy access savings chart.

Easy access savings analysis

Top deals at £10,000 gross.

For retirees withdrawing money from their pension to supplement their income, a monthly interest account will usually be the best option. While the best rates on monthly interest accounts are available on fixed rate accounts, savers are able to get competitive monthly rates on easy access accounts.

In order to get the best interest rates on monthly interest account, savers will have to sacrifice the ability to quickly access funds and instead lock their money into a fixed rate account. In addition to this, as with easy access accounts, many of the top rate accounts can only be opened online. Research from Moneyfactscompare.co.uk shows that, as with the easy access savings account, the year-on-year rates on monthly interest accounts have increased by 0.12%, however since February 2019 to today the rate has dropped by 0.02%. Again, this would suggest that savings rates have peaked and savers might be better opening a savings account now to benefit from the best rates available. For the current best rates, visit our monthly interest chart.

Monthly interest analysis

Top deals at £10,000 gross.

Commenting on the rise in cash withdrawals from pensions, Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Retirees may be withdrawing cash from their pensions for various reasons, either to plug a debt gap, boost disposable income or even to reinvest. There are signs that the cash could be going into easy access accounts, away from stock market volatility and within easy reach. In recent months, several providers have cut their easy access rates, plus some of the top deals include withdrawal restrictions.

“The downside to choosing an easy access account is the return, which is variable and may well drop should we see a base rate cut before the year is out. As the average easy access rate stands at just 0.64%, it’s clear to see that there are much worse rates out there for savers than can be found in the top rate tables. Indeed, the Flexible Saver from HSBC pays a disappointing 0.15% – 10 times less than the top rate in the market today on offer from Virgin Money, which pays a rate of 1.50% on its Double Take E-Saver.

“It is slightly worrying to find such a large rise to both the volume and value of pension cash withdrawals, hitting a new record since pension freedoms were introduced. If retirees take too much cash out of their pensions from the age of 55, they may end up with little provision for the future, which they are unlikely to be able to recoup.

“Seeking independent financial advice, both when withdrawing cash and choosing a product in which to invest, is essential during a period of economic uncertainty. Taking out an easy access account may be an easy choice, but it doesn’t necessarily mean it’s the right one.”