The amount of cash retirement savers are withdrawing from their pensions has increased dramatically since pension freedoms were introduced.
Last year, savers took £15.3 billion from their pensions, according to official figures from the Financial Conduct Authority.
In the second quarter of 2017, withdrawals reached a five-year peak, with 42,500 savers taking 34.3 billion from their savings.
The year before, when pension freedoms were introduced, the figure was just £5.6 billion even though pent up demand from savers waiting from the previous year to access their cash inflated the figure.
Savers changing habits not spending choices
Although the figures show savers withdrawing money at a much higher rate than expected, they do not support claims of reckless spending.
The FCA does not track how savers spend their pension cash.
“More likely, it is investors deciding to take roughly the same amount of pension but doing so via drawdown rather than annuity or final salary pension,” commented pension expert Simon Laight, of law firm Pinsent Masons.
“Excessive amounts are not leaving the pension system. Instead, investors are switching the method of taking a pension. ”
“The switch is inevitable given the presence of a number of factors. First, there is the drop in rates that savers can earn on annuities. Second, the same economics are leading to inflated cash-in values for final salary promises. Those in final salary schemes see eye-watering amounts on offer in exchange for cancelling their final salary promise.”
Clever people outfoxed by complicated pensions
A third of the money was taken out of pensions by savers aged between 55 and 65 years old with most cash withdrawn as lump sums rather than regular income.
“Income drawdown is complex. You’ve got to successfully align three complex areas in order not to run out of money before you die: investment strategy, spending policy and guessing correctly how long you are going to live. These three factors have been exercising clever people for decades. What are the chances of your average Joe Public getting it right?” Laight said.
Pension freedoms for the over 55s were introduced in April 2015 and extended to all expat QROPS offshore pensions in April 2017. Not all pension providers offer the service.
