A total of 648,000 people withdrew money from their pensions flexibly in the eight months to December 2021, with the average amount at £12,800.

In total during this period, £8.3bn was withdrawn, which is up from the £7bn recorded in the same period of 2020, according to the latest HM Revenue & Customs figures.

Since the dawn of pension freedoms in 2015, the total value of flexible withdrawals from pensions tops £53bn.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “We’re set for a record year of pension withdrawals as the cost-of-living bites, and we dipped in for a fifth more cash in the first part of the tax year.

“This could be down to several factors. The pandemic no doubt put pressure on people’s finances and there is also the chance that soaring inflation is forcing more retirees to tap into their pensions to meet the spiralling cost of living.

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“While the amount of money being accessed has gone up, this is not necessarily a cause for concern. There’s no indication retirees are draining their funds – the average amount taken was £12,800 so far this tax year. This continues a downwards trend in the average amount being accessed though we will see if the ongoing cost of living crisis alters this in the coming months.”

Pension tax charges

Meanwhile the statistics also reveal that 9.4 million people are contributing to a personal pension with annual average payments increasing from £3,000 in 2018/19 to £3,300 in 2019/20.

Overall, £31.3bn was paid into pensions in 2019/20, up from £27.9bn in 2018/19.

However, the figures reveal tax paid on payments from private pensions (occupational and personal pensions) has increased to £19.2bn in 2019/20. This is up from £18.7bn in 2018/19.

Further, in 2019/20, 42,350 taxpayers reported pension contributions exceeding their Annual Allowance through Self-Assessment. This totalled £949m in 2019/20, up from £819m in 2018/19 and £912m in 2017/18.

And 8,510 Lifetime Allowance charges were reported in 2019/20, standing at £342m. This is a 21% increase from £283m in 2018/19.

HMRC noted: “Reductions in the annual and lifetime pensions tax allowances since 2010 have resulted in a significant increase to the number and value of charges. In particular, the introduction of the annual allowance taper for high earners in 2016 and the reduction of the money purchase annual allowance in 2017.”

Becky O’Connor, head of pensions and savings at Interactive Investor, said: “People and their employers are contributing more to personal pension schemes and therefore benefiting from more tax relief through working life, which is a good thing. However the flipside of this apparently positive picture, particularly for higher earners, or those drawing an income or approaching retirement, is the risk of being caught by the snares of annual and lifetime allowance charges.

“It is a classic case of ‘giveth, and taketh away’, only this plays out over the decades-long period of someone’s working life and then retirement years.”