Latest figures reveal unsustainable withdrawal rates and lack of guidance or advice prevail.
The latest retirement income market data published by the FCA reveals that 645,000 pension plans were accessed in 2018/19, of which 55% – 355,000 – were fully withdrawn. Just 11% of plans were used to buy an annuity.
Of those pots that were fully withdrawn, 90% were valued at less than £30,000. Meanwhile, among retirees taking a regular income from their pension, 40% were taking out cash at unsustainably high withdrawal rates of 8%-plus.
Alarmingly, almost 50% of plans were accessed without any form of guidance or advice being taken by the plan holder. A further 37% took regulated advice, while 15% made use only of Pension Wise guidance.
The implications of the figures are complex, but there are concerns at the high proportion of plan holders who have accessed their pension without taking advice or guidance.
Mark Futcher, head of workplace wealth at Barnett Waddingham, warns that “people are putting their futures at risk” by “flying blind” in this way.
He adds: “There are so many factors to consider when choosing between annuities, drawdown, and taking a pension in cash, including how long someone will live, the investment environment, the geopolitical situation, their future health and long-term care needs. Making the wrong decision at retirement can easily waste 10 years' worth of contributions.”
However, the preponderance of unadvised withdrawals may reflect the fact that the vast majority of pots were worth £30,000 or less, with 40% worth under £10,000; many people may have felt the amounts involved were too small to make it worth seeking advice.
Jon Greer, head of retirement policy at Quilter, comments: “Failing to get advice could have disastrous long-term consequences unless you have a very good understanding of the tax landscape and are able to objectively plan a sustainable retirement strategy, which very few people can.
“Scarily, 350,000 pension pots were fully withdrawn at the first time of access; 90% of which were less than £30,000 in value. If you take a lump sum in a single tax year, it is likely to result in having a much heftier income tax bill than if you chose instead to take the money out gradually.”
There are worrying implications for those making regular withdrawals too. Across all pot sizes below £250,000, the most common withdrawal rate is 8% or more, which means there’s a risk that people will run out of money in later life. As Steven Cameron, pensions director at Aegon, points out, “this is very unlikely to be sustainable throughout retirement”.
Greer warns that there are few instances where this would make financial sense. “An appropriate withdrawal rate depends on what other assets you have at your disposal, other sources of income, your age, your investment return and so on,” he says.
However, Cameron points out that an 8% withdrawal rate “is much less extreme than cashing in the full amount and might be appealing to those who want to use their DC pot to boost their income in early retirement while relying on state pension and any defined benefit pension in later years”.
The figures do flag up the risks involved in accessing pensions under the pension freedoms – not only the danger of running out of money altogether, but the potential for a much larger tax bill than necessary.
Says Greer: “It is important to think about the big picture and get advice on all the assets at your disposal in retirement, not only your pensions. And even if advice isn’t right for you, guidance comes at no cost to the public and everyone should seek guidance as a basic first step before taking cash from their retirement fund.”
Why not assume that most people know what they are doing?
I am surprised how often commentators seem to think that the general public are plain dumb. The truth is probably that these people are likely to be generally savvy when it comes to their finances and have already worked out what suits their own circumstances the best. Have you not heard of the wisdom of crowds?
In the case of taking advice or guidance, in my own situation I found that I could go on a 3 month waiting list for an appointment to discuss my options, by which time I would have been in a new tax year and lost the possibility to use my ISA allowance. if guidance is going to be offered it needs to be timely.
At the same time the distrust of advisors runs deep, until the industry can be seen to offer real value for money then do not be surprised if the public continues to turn its collective back.
Pension freedoms are the best thing that I can remember any government doing in recent years and I suspect it all came about because of the financial crisis of 2008 - maybe this would be a better article to write, how the people really got their own back on the financiers.
Trust the wisdom of crowds!