Pension savers issued ‘concerning’ warning as expert reveals top easy access savings rates
Pension freedoms were introduced from April 2015, with the move meaning savers were given the option to take cash out once they reach the age of 55, with 25 percent of each lump sum withdrawn being tax-free.
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Fast forward five years, and HM Revenue and Customs (HMRC) has said that the number of individuals taking money out of their pensions has hit a new high.
According to the latest research by Moneyfacts.co.uk, savers withdrawing their cash from pensions may well be a contributor to the rise in deposits in accounts that are accessible without penalties, with Moneyfacts suggesting consumers may be opting for a standard savings account due to market volatility.
Between January and March this year, 348,000 individuals made a withdrawal from their pensions.
This is a 23 percent increase from 284,000 in the same quarter of the previous year.
At the same time, the value of flexible payments from pensions is the highest recorded for Q1 of any year since pension freedoms began.
Indeed, £2.46 billion was withdrawn from pensions flexibly, a 19 percent rise from Q1 2019.
And, over the same quarter, statistics from the Bank of England highlighted £7.8 billion was deposited into accounts that are accessible without penalty, which includes easy access accounts.
Moneyfacts.co.uk has warned savers preparing to apply for an easy access account that “speed is of the essence”.
This is because deals are being withdrawn, and rates are currently on the decline.
Savings market analysis by Moneyfacts.co.uk shows that the average easy access rate in May 2019 stood at 0.62 percent (on top deals at £10,000 gross), with this dropping to 0.59 percent in January 2020.
Today, these rates average at 0.32 percent.
Rachel Springall, Finance Expert at Moneyfacts.co.uk, said: “The rise in the number of individuals choosing to withdraw their pension cash hitting a new high is slightly concerning, especially as the value of withdrawals was the highest recorded for Q1 in any year since pension freedoms began.
“Retirees may well be doing so to boost their disposable income in light of the Coronavirus pandemic, however, any immediate respite could have a devastating impact on their pension provisions for the future that they may be unable to recoup.
“One type of savings vehicle consumers appear to be using to hold their pensions cash are easy access accounts, perhaps due to their flexibility and to avoid stock market volatility, but a flood of pensions cash into this market can have consequences that may already be playing out.
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“Indeed, savings providers who are inundated with cash may pull deals entirely, add opening restrictions or cut rates to deter investors.
“The easy access market is already suffering from rate cuts and withdrawals in light of the Coronavirus pandemic and the subsequent base rate cuts, so a flood of pensions cash could result in more reductions or withdrawals.”
So, for those looking to open an easy access savings account, what does the finance expert suggest doing?
“If savers are planning to open an easy access account, then they would be wise to consider the more unfamiliar challenger banks and look away from the high street banks to find the best returns,” she said.
“Savers who keep their cash in a high street bank easy access account could be earning next to nothing, for example NatWest pays just 0.01 percent.
“In terms of the best deals, NS&I may be paying the top easy access rate today, but there is no guarantee this will stay in the pole position in the future.
“The savings market is changing quickly, so if consumers are hoping to grab the best possible return on their cash, they will need to act fast.
“It is worth pointing out that easy access accounts pay a variable rate of interest and this can change at any moment.
“Consumers would be wise to seek independent financial advice before they withdraw their pension cash so that they can understand the impact it may have on their future provisions.
“Taking cash out of a pension and putting it in a savings account may be a quick fix, but it might not be the right choice.”
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