New ‘retirement income market’ data published by the FCA today shows that in the period October 2022-2023, around 56% of all pension pots accessed were cashed out in full, compared with just over a third (36%) in some form of drawdown and just 8% used to buy an annuity.
One striking feature of the figures is the fact that the proportion of pots cashed out in full has been consistently in the 50-60% range in every six month period since the start of pension freedoms.
The pension pots most likely to be cashed out in full are, not surprisingly, those of the lowest value. In the latest six month period out of just under 205,000 pots cashed out in full, around two thirds (137,000) were worth under £10,000 and nearly nine in ten (184,000) were worth under £30,000.
Looked at by age, around 70% of full encashments are by people in the 55-64 age group, with most of the rest cashing out before the age of 75.
Commenting on the figures, LCP partner Steve Webb said: “These figures highlight the fact that hundreds of thousands of people reach retirement each year with very small pension pots. These pots would generate very little regular income if spread out over the decades of retirement. Instead, the majority of people still judge that the best thing to do is to cash out their pension and enjoy some additional cash at the start of their retirement. But with dwindling numbers of retirees having Defined Benefit pensions to fall back on, we urgently need to boost pension pots to a size where it makes sense to keep them rather than cash them in. With every new set of figures we see the consequences of the government’s delay in expanding automatic enrolment, and the need for urgent action to get Britain saving more for retirement”.
Stephen Lowe, group communications director at retirement specialist Just Group, said: “The number of pension pots being accessed each year is trending upwards as you would expect with an ageing population and most of them – nearly 57% - are full encashment and most full withdrawals are by people yet to reach State Pension age.
“These may be smaller pots but the fact that the average value is £12,500 shows that these are not insignificant amounts of money and there will often be tax to pay, yet most encashments are completed without any regulated advice or guidance from Pension Wise, the government’s free, independent and impartial service.
“Annuity sales were surprisingly muted given that these figures cover a period when annuity rates rose sharply from around 4.6% to 7.2% for a 65-year-old, but that may reflect worries about the high rates of inflation that were evident at that time.
“Withdrawal rates from drawdown still look quite high, especially for modest pots that are still significant in terms of providing high levels of income. For example, nearly half (48%) of pots between £50k-£100k are being withdrawn at more than 8% a year while a further 15% are being withdrawn at 6-8%.
“Overall, the data pattern reflects previous years, with a lull in sales during the pandemic. While it’s good to have some figures to work from, they don’t give us much information about what people are doing across all their pensions and investments. Cashing in pensions or high withdrawal rates may or may not be suitable depending on circumstances – there is scant information showing us what people are doing in aggregate.”
Richard Sweetman, Senior Consultant at leading independent consultancy Broadstone, said: "Although plans with smaller pension pots have the greatest concentration of high withdrawal rates, it is concerning that more than half of plans are seeing regular withdrawals of 6% or over.
"Retirement adequacy is already a huge issue in this country, a concern that will only grow as more pension savers reach retirement with greater reliance on DC rather than DB provision. It is vital that pensioners are accessing their pots sustainably, drawing an income that will meet their needs in retirement but also last throughout their late-life to avoid a cliff-edge drop in their standard of living.
"It indicates that a sea-change in awareness, education and support needs to specifically targeted at those nearing the end of their accumulation journey to help drive informed decision-making taking into account factors like longevity, personal circumstances and retirement objectives.
"The drop in annuity sales is a little surprising given that rates have improved. In future we might see a trend towards customers purchasing annuities later on in retirement, securing their essential income at higher rates given their advancing age."
Brian Nimmo, Head of Redress Solutions at actuarial consultancy and DB redress specialists OAC, said: “DB transfers have consistently continued to decline and the latest FCA data shows that trend continuing.
“Falling transfer values are likely to have accelerated that trend as pension savers increasingly see the risk in losing the value of the guarantees in a DB pension by transferring into a DC arrangement. A significant number of advisers have stopped advising on DB transfers too as they decide that increasing regulation makes it too risky for their business, and the FCA's 'polluter pays' reforms may accelerate that trend.
“DB pensions offer huge security and peace of mind for pensioners in retirement in guaranteeing a certain level of income and so, while a transfer may be the right decision for a limited pool of pensioners, we would expect volumes to continue falling over the coming years.”
FCA Retirement Income Data 2022 to 2023
|
