The pension freedoms have given people the chance to spend their pension savings as they see fit, rather than being funnelled into an annuity, as was often the case pre-freedoms. As a result, huge numbers of retirees have opted for income drawdown, which allows them to withdraw from their pot when they wish – and new figures show that these withdrawals have just hit record levels.
New data from HMRC shows that the number flexible pension withdrawals hit a new high between July and September this year, with a record 585,000 payments made to 258,000 people. But there's no cause for alarm – while there are continued fears that people may be spending their pension pot too quickly, the data appears to suggest that retirees are drawing from their pot in a sustainable manner.
The figures show that the total value of withdrawals actually dipped to £2 billion, down from £2.3 billion in the previous three-month period, which means typical withdrawals are edging down, too: the average stood at £3,350, with each person making an average of 2.3 withdrawals in the quarter.
"Retirees continue to manage their money sensibly, as an increase in the number of pension withdrawals masks the fact that the value of each withdrawal has now stabilised at between £3,000 and £4,000," commented Nathan Long, senior pension analyst at Hargreaves Lansdown. "Many of these withdrawals are now courtesy of the retire-as-you-go generation drawing on their pension again and again for long-term income as their lifestyle dictates."
This all suggests that the freedoms, particularly drawdown, are working exactly as intended – they're enabling individuals to draw from their pot when they wish, with fears of retirees blowing all their cash on sports cars appearing unfounded. Indeed, flexible payments have gradually stabilised over the years since the freedoms were introduced, as a new generation of retirees adapts to the new way of operating.
For many, income drawdown can prove the ideal solution to their retirement income needs. They can take money from their pot to fund their lifestyle as and when they need, all the while keeping their remaining funds invested to benefit from the potential for further growth. As with any option, there are risks involved – principally that you could end up spending your pot too quickly and run out of money early in retirement – but for those taking a measured approach to withdrawals, it could work well.
Yet for some, the lack of guaranteed income could be too risky, in which case they may look to annuities as an alternative – or even as an addition, with it perfectly possible to get a blended solution whereby some of your pot is used to purchase an annuity and the rest is kept in drawdown. An annuity has the advantage that you'll get a guaranteed income for life, though with rates not always that high, it's vital to compare the options available. Our annuity service could be perfectly placed to help, helping you decide how to make the most of your pension funds.
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