The announcement of the pension freedoms, while welcomed by many, were also met with fears that pensioners would blow their life savings on Lamborghinis (or other ill-advised luxury purchases) instead of using the funds for what was intended – to provide an income in retirement. Happily, it appears that these fears have been almost wholly unfounded, with research from AJ Bell showing that pensioners are a rather more sensible bunch.
The analysis, based on AJ Bell's own customer data in the first year of the pension freedoms, shows that full pension encashment represented just 1% of all withdrawals made. Even then, the majority (77%) of customers who opted to take their pension pot in one go had a fund that was worth less than £30,000, with the average standing at just under £25,000.
Opting for partial withdrawal, or income drawdown, is therefore far more popular, with the figures suggesting that most people are using the pension freedoms for what they were intended – to provide the freedom to use their pension funds in a sensible, sustainable manner to secure an income throughout retirement.
"The stampede for the exit door to fund frivolous purchases following pension freedoms has not materialised," said Billy Mackay of AJ Bell. "The sports car driving pensioner was a nice image, but the reality of tax charges on large withdrawals has kept people's feet on the ground.
"[Instead], our experience has been that people are using the new flexibility to produce a steady, tax efficient income stream in the form of partial withdrawals where they don't want their hands tied by an annuity."
Find out more about the pension freedoms (and the associated risks) with our guides.
Want a guaranteed income throughout retirement? An annuity is still the only way to achieve that. Find out more.
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