The pension freedoms were designed to give retirees the chance to spend their pension pot as they see fit, removing the obligation to buy an annuity and letting them access their cash with fewer tax restrictions. For the most part, they seem to be having the desired effect, with most people taking a sensible approach to pension access –but unfortunately, that's not the case for everyone.
The Association of British Insurers (ABI) has published statistics for the first complete year since the reforms were introduced – taking data from April 2015 to April 2016 – and the results paint a broadly positive picture. The majority of savers are sensible, with 57% of pension pots having 1% or less withdrawn during the final three months of the data, but that's not to say that everyone's quite so rational.
Indeed, there are growing fears that many pensioners could run out of money in retirement, with signs that some may be withdrawing too much too soon – which means their pot could run out in a decade or less. The figures show that 4% of pots had 10% or more withdrawn, and many other retirees took their whole pot in one go – if that money isn't spent wisely, it could result in a frugal later life for many.
There's also been a notable drop in annuity sales, as had been predicted, with such products having received £950m in investment during the last quarter, down from £1.1bn in the previous three months. Conversely, sales of drawdown products remain consistent, with £1.48bn invested (barely changed from £1.49bn previously).
While drawdown offers far more flexibility, the fact that many people are shunning the guaranteed income that can be achieved through an annuity is still cause for concern. So, too, is the fact that some seem to be withdrawing too much. While it seems to be the case that the majority of those who are fully cashing in had relatively small pots (96% of those who withdrew their pension in the most recent quarter had pots worth less than £10,000), the fact that some are withdrawing larger proportions from bigger pots could signal a rise in financial issues in the future.
Yvonne Braun, the ABI's director of Policy, Long Term Savings and Protection, said that while the data indicates that most people are taking a sensible approach, it "also suggests a minority are withdrawing too much too soon from their pension pot - 4% of pots are having a tenth or more withdrawn - and many other customers are taking their entire pot in one go.
"There may well be other factors at play here, such as people having other retirement income, such as final salary pensions or multiple pots. But this is a warning sign that requires further investigation."
The message is clear: if you intend to make full use of the pension freedoms, don't get too carried away! Withdrawing cash is all well and good, and you may have good reason for it – such as paying off debts or making those vital home improvements – but just make sure you'll have enough left over to live off for the duration of your retirement.
And, if you're concerned that you may not be able to manage your money effectively, don't forget about annuities – they still offer the only way to secure a guaranteed income for life, so for many people, they could still offer the ideal solution.
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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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