Pension withdrawals jump to £52 billion in cost-of-living crisis

Inflation may have returned closer to ‘normal’ levels in recent months, but three years of spiking prices and rising interest rates has had a huge impact on Brits’ retirement plans, with both the number of people accessing their pension and the amount withdrawn surging in the 2023/24 tax year.

Savers withdrew over £52 billion from their retirement pots in 2023/24 – 20% higher than the previous year – in the wake of rising inflation, new FCA data reveals. The total number of pension plans accessed for the first time also spiked by 20% to 885,455 in 2023/24, with around a third choosing to take financial advice.

This was an inevitable consequence of the cost-of-living crisis, with squeezed savers forced to turn to their pensions to make ends meet and help loved ones get through a temporary period of financial pain. As inflation calms, the volume and level of withdrawals via drawdown should also flatten out.

Think before you withdraw

Anyone accessing their retirement pot for the first time needs to think carefully about the long-term sustainability of their withdrawals and the tax implications of accessing their pension. Taking too much, too soon from your hard-earned pension runs the risk of exhausting your fund early, while you may also end up paying unnecessary income tax if your withdrawal pushes you into a higher income tax band.

In addition, flexibly accessing taxable income from your retirement pot will trigger the ‘money purchase annual allowance’, reducing the amount you can contribute tax-free to a pension from £60,000 a year to just £10,000 a year.

This message is particularly important ahead of a Budget when rumours are swirling about the future of pension tax incentives. While this can be destabilising, it is vital savers focus on their long-term goals rather than trying to second-guess what the chancellor may or may not do on 30 October.

Drawdown remains the top choice for retirees

For those choosing to access their retirement pot for the first time, drawdown remains the overwhelming top choice, with the number of people entering drawdown surging 28% year-on-year to almost 280,000. Those choosing this route can benefit from flexibility and the potential for their fund to enjoy long-term growth.

It is crucial anyone entering drawdown has a clear plan for making their pension last, which means you need to regularly review your retirement strategy and withdrawals to make sure they remain sustainable. If you aren’t sure how to go about this, it’s worth considering employing a regulated financial adviser to help you navigate what can be complex choices.

For those who don’t want to take any investment risk or engage with their pension in retirement, annuities might be a more suitable option. Surging interest rates have unsurprisingly led to a spike in annuity sales, up almost 40% in 2023/24 compared to the previous year.

Anyone going down this avenue needs to be absolutely sure about the decision as once you lock into an annuity, there is no going back. It is critical before buying an annuity that you shop around the market not just for the best rate, but for the product that is most appropriate to your circumstances.

It is also important to remember that you can mix-and-match annuities and drawdown to suit your needs. For example, you could choose to purchase an annuity to cover your fixed costs, retaining flexibility and the possibility of enjoying long-term growth with the rest of your pot. Equally, you could opt for drawdown in the early years of retirement, then convert your pot into an annuity later on, when you should get a better rate. The key is to focus on your long-term retirement goals and take an approach aligned to those goals.