More and more people over 55 are drawing on their pensions and more than half are collecting them in full, new official figures reveal.
Almost 740,000 pension funds were accessed in the 2022-23 financial year, around 5 per cent more than the previous year, as people struggled to pay household bills in a period of rising inflation.
About 56 percent of jackpots are being cashed out in full; most of them are worth £10,000 or less, according to new data from the Financial Conduct Authority.
Meanwhile, 36 percent was invested in a drawdown plan and 8 percent was used to purchase an annuity in the year to October 2023.
Capitalized: There has been a 5% increase in the number of pensions being collected, FCA data shows
Annuity sales fell almost 14 percent to around 59,200, even though better deals appeared on the market as interest rates began to rise.
However, recent industry figures covering all of 2023 suggest that more savers are being tempted by a strong recovery in the guaranteed retirement income that an annuity will provide.
Annuities were shunned for years due to low rates and restrictive terms, and after earning a bad reputation following mis-selling scandals.
The 2015 pension freedom reforms led most savers to keep their funds invested and live off the withdrawals, despite the financial market risk it implied.
Meanwhile, the new FCA report showed a sharp drop in the number of people moving from final salary pensions – which like annuities provide a guaranteed income for life – to invested retirement plans where the holder takes on the investment risk.
Final salary schemes have dramatically reduced the value of offers made to workers to transfer, because rising interest rates have improved their ability to fund long-term pensions.
Former Pensions Minister Steve Webb says of figures showing that most defined contribution funds are fully cashed in: ‘These figures highlight the fact that hundreds of thousands of people reach retirement each year with defined contribution funds. very small pensions.
The temptation to withdraw cash instead of earning retirement income is great, especially in light of the cost of living crisis.
Paul Leandro, partner at Barnett Waddingham
“These funds would generate very little regular income if spread over decades of retirement,” adds Webb, now a partner at LCP and This is Money’s pensions columnist.
‘Instead, most people still think the best thing they can do is collect their pension and enjoy some extra cash at the start of their retirement.
‘But with fewer and fewer retirees having defined benefit pensions to fall back on, we urgently need to grow pension funds to a size where it makes sense to hold on to them rather than cash out.
“With each new set of figures we see the consequences of the government’s delay in expanding automatic enrollment and the need to take urgent action for Britain to save more for retirement.”
Paul Leandro, partner at Barnett Waddingham, says: ‘The FCA should not be surprised by the rising levels of cash withdrawals from pension funds, but it should be concerned.
‘Pension freedoms opened Pandora’s box: the temptation to withdraw cash instead of securing a retirement income is great, especially in light of the cost of living crisis.
‘Some withdrawals may be sensible and financially sound, when the individual has adequate resources, but most are not.
‘This is further evidence that we need to create a much stronger retirement framework. People need to be able to better visualize their income needs in retirement, and there needs to be a tangible way to understand the side effects of taking on too much cash too soon.
‘The current pension outlook seems terrible. Lack of sufficient contributions, coupled with too much cash being withdrawn too soon, makes the future very bleak.
“Innovation is essential to better support people’s decision making: the best time was ten years ago, the second best time is now.”
Richard Sweetman, senior consultant at Broadstone, says: ‘Although schemes with smaller pension funds have the greatest concentration of high withdrawal rates, it is worrying that more than half of schemes are seeing regular withdrawals of 6 per cent or more. .
‘Pension adequacy is already a big issue in this country, a concern that will only grow as more pension savers enter retirement with greater reliance on defined contributions rather than defined benefit provision.
‘It is vital that pensioners access their funds in a sustainable way, obtaining an income that meets their needs during retirement but also lasts throughout their old age to avoid an abrupt drop in their standard of living.
‘It indicates that a step-change in awareness, education and support is needed specifically targeting those nearing the end of their accumulation journey to help drive informed decision-making taking into account factors such as longevity, circumstances personal and retirement goals.
‘The drop in annuity sales is a bit surprising given that rates have improved. In the future we could see a trend towards clients purchasing annuities later in retirement, locking in their essential income at higher rates given their advanced age.’
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