Britain’s pensioners are moving their pots into drawdown in higher numbers now than before pension freedoms.
Data from the Financial Conduct Authority (FCA)’s July 2017 Retirement Outcomes interim report reveal more than 1m defined contribution (DC) pension pots have been accessed since the pension freedom and choice regime came into force in 2015.
The majority of these pots – 64 per cent – were less than £30,000 in value – a tiny amount when compared with the value of the state pension, which the FCA put at approximately £200,000.
Assuming someone takes state retirement at 67 and lives for 25 years, at £8,094 a year, the value of the state pension (based on current levels) is £202,350.
It’s not hard to understand why people with small pots have been taking the money as cash: the FCA report shows 54 per cent of all pots were completely encashed. Of those pots which were completely taken in cash, 90 per cent were from pots that were £30,000 or less.
But not all of this money went on Lamborghinis or Land Rovers or even a souped-up Ford Fiesta. Much of this, the FCA says, went into other savings vehicles, such as Isas.
And then there is drawdown. The FCA paper stated: “Drawdown has become much more popular: twice as many pots are moving into drawdown than annuities.
“Before the pension freedoms, more than 90 per cent of pots were used to buy annuities.”
But this is changing. The flexibility drawdown offers – to remain invested while drawing as much income as needed – perhaps even within the current personal annual allowance of £11,500 – is attractive.
Andrew Tully, pensions technical director for Retirement Advantage, comments: “The FCA stats show a huge shift from the world before pension freedoms.
“Drawdown used to be the preserve of the wealthier retiree, but that is no longer the case, as for all pot sizes in excess of £30,000, drawdown is the leading solution.
“People are attracted by the flexibility of drawdown and, for many, the key attraction is the potential to cascade pension wealth through the generations in a tax-efficient way.”
However, this has led to some potentially problematic consumer behaviour, the City watchdog has highlighted.
According to the FCA: “Our research shows very low levels of shopping around and data from the Association of British Insurers (ABI) shows that 94 per cent of non-advised drawdown sales were made to existing customers.
“This suggests limited competitive pressure to offer good deals.”
As a result the City regulator says it plans to investigate further whether consumers are getting good value when they move into drawdown without taking advice.
Investment choices
According to figures from pension provider Aegon, the investment choices people are making post-pension freedoms have not been significantly “risk free” in retirement.
