The number of people aged 55 plus accessing their pensions has hit its highest level since pension freedoms were introduced in April 2015, with £1.86 billion withdrawn by more than 200,000 people between April and June.
The total amount withdrawn this past quarter has risen by 5 per cent year on year, while the number of people taking money out is up 25 per cent over the same period in 2016, and up more than 100 per cent since 2015.
But although more individuals are jumping on the pension freedoms bandwagon, they are drawing down smaller sums. The average withdrawal has trended steadily downwards, from £18,500 in the second quarter of 2015 and £11,100 in the second quarter of 2016 to £9,300 this year.
At the same time there has been a marginal increase in the number of withdrawals made per person, as savers gradually start to set up regular payments rather than taking one-off lump sums.
Commentators are viewing the trends in pension withdrawal as continuing evidence that people ‘are accessing their retirement pot in a sensible way rather than ravaging their savings to splurge on fast cars’, as Tom Selby, senior analyst at AJ Bell puts it.
However, in its recent Retirement Outcomes Review (ROR) interim report, the FCA reported that ‘accessing pots early has become “the new norm”’, with 72 per cent of pots accessed by consumers under 65. Most of them took lump sums.
But while the indications are that people are behaving sensibly in terms of relatively modest withdrawals, it’s still too early to understand whether these patterns are genuinely sustainable, given the length of time their pension pots may have to last.
‘The government and the regulator will need to continue to monitor this activity,’ says Rachel Vahey, product technical manager at Nucleus. ‘For now it appears to be becoming much more the norm to cash in small amounts of pensions.’
Stephen Lowe, group communications director at Just, comments: ‘We still lack evidence to know whether this level of withdrawal is healthy or should be worrying.’
He continues: ‘The FCA’s ROR research found many people who thought they were doing the right thing by taking pension money had a “penny drop” moment and questioned their decision, when confronted with facts about life expectancy and the size of fund needed to deliver even a basic retirement income.’
It’s important that people are given support and advice as they consider their options; in many cases pension flexibility enables a gradual move from work to retirement. But as Ian Browne, pensions expert at Old Mutual Wealth observes, it’s also important that government does not create impediments for them as they manage the transition.
He says: ‘Giving people the freedom to withdraw retirement income as and when required has made a flexible transition to retirement possible. Many will prefer to phase into retirement, reducing their working hours and topping up income with pensions, particularly as the state pension age is increasing.
‘But under the money purchase annual allowance (MPAA), those who choose to top-up income with a retirement fund and then later make contributions during periods of work could be punished by this regressive curb on the standard annual allowance.’
The MPAA is the amount consumers can put into a pension once they have started drawing an income from it. It is to be cut from £10,000 to £4,000, with effect from April 2017.
This article was written for our sister magazine Money Observer.