Shifting pensions landscape

When former Chancellor George Osborne announced plans to allow savers aged 55 and over unfettered access to their pension pot from April 2015, nobody was quite sure how people would react. Could they be tempted to splurge their retirement pot on flash cars? Or would they pause for thought and consider the implications a spending spree would have on their retirement plans?

While it is early days, data is starting to emerge suggesting people are, on the whole, using the freedoms sensibly.

The story so far

Data published by the Association of British Insurers, the trade body for the insurance industry, shows that savers have withdrawn over £8bn from their pots in the first 12 months of the freedoms.

Some £4.3bn was been taken out in lump sum payments, at an average of £14,500, while just over one million drawdown payments have been made, at an average of £3,800 each.

Digging deeper into the statistics from the first three months of this year, we can see the rate of withdrawal – that is, how much people are taking out as a proportion of their total pension pot size. This data suggests that, broadly, people are using the freedoms in a calm, measured way rather than being tempted to splurge the lot quickly.

Just over half (57%) of withdrawals during the three-month period were below 1%, while just 1 in 25 were worth 10% of the pot or more. This indicates the tax treatment of pensions – a quarter of withdrawals are tax free, with the remaining 75% treated in the same way as income - is acting as an effective ‘brake’ as savers look to avoid being pushed into a higher income tax bracket. 

Unsustainable?

The ABI has suggested the fact some people are taking out more than 10% of their pot is evidence savers might be withdrawing “too much, too soon” from their retirement fund. However, whether this is true or not depends on the other assets and income sources the individual has, and how old they are when they start taking money out.

For example, a 60 year old man with a defined benefit pension guaranteeing them £30,000 a year, linked to inflation, for life and a personal pension worth £45,000 might feel comfortable stripping out, say, £15,000 from their personal pension in order to pay off an outstanding debt or help out their kids at university. In this scenario, the withdrawal – representing  one third of his personal pension pot – looks unsustainable on the face of it.

But if his total outgoings per year are below £30,000, then it might be a perfectly sensible decision.

The new normal

While clearly more data on savers’ overall wealth and income would help to round this complex picture, we are starting to see a new retirement world emerge from the ashes of the pension freedom reforms.

Drawdown has now overtaken annuities as the retirement vehicle of choice for most retirees, with £1.48bn invested in 23,200 drawdown products in the first three months of 2016, compared to annuities where £950m was invested in around 18,000 policies.

But while none of the data produced so far suggests savers are doing anything other than making sound retirement decisions, regulators and the Government will need to remain vigilant, particularly if signs do emerge that people are spending their pension pot too quickly.