Out-Law News 2 min. read

Increasing amounts of cash withdrawn from pension pots under new freedoms


The amount of money being withdrawn by UK savers from their pension funds following pensions freedom reforms has increased dramatically in the last few years, new data shows.

Investors withdrew £15.3 billion from their pension funds in 2016/17, according to data provided by the Financial Conduct Authority (FCA) under a Freedom of Information (FOI) Act request to a wealth management firm. That compared to just £5.6bn in 2012/13 – a rise of 173%.

The value of withdrawals rose sharply from £2.3bn in the first quarter of 2015 to £3.2bn in the second quarter, following the introduction of new rules in April 2015 allowing savers to access their pension pots before they reach retirement.

In the second quarter of 2017 42,495 savers withdrew £4.3bn worth of funds, the highest quarterly amount in the last five years.

Pensions expert Simon Laight of Pinsent Masons, the law firm behind Out-Law.com, said the increase in drawdowns was not necessarily indicative of irresponsible spending by investors. 

“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. Excessive amounts are not leaving the pension system,” Laight said. “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,” Laight said.

Laight said the flexibility offered by income drawdown under the pension reforms, which gives savers the ability to access their whole pot in one go, was a powerful driver for switching to income drawdown.

“That said, these underlying influencers are storing up problems for the future. The advice gap, where savers are not willing to pay the cost of professional financial advice, is dangerous,” Laight said.

“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 really clever people for decades. What are the chances of your average Joe Public getting it right?” Laight said.

More than a third of the withdrawals were made by people aged between 55 and 65. The pensions reforms gave savers over 55 more freedom to access their savings without facing heavy tax penalties or having to purchase an annuity.

The latest data backs up a report published by the FCA in July, when it said 72% of pension pots were accessed by savers under 65, with most of those people electing to withdraw their funds in a lump sum rather take a regular income when doing so, and twice as many pension pots moving into drawdowns instead of annuities.

The FCA said the FOI data did not include all data on transactions made through nominee accounts, which meant there could be other drawdowns not captured in the figures. The data also only captured new drawdowns and did not generally include transfers, top-ups, alterations, increments and renewals.

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