FCA Retirement Income Market Data

Last week the Financial Conduct Authority (FCA) published their collected data under the above title for the period July-September 2015.

It should be admitted that ordinarily such a set of figures would hold little appeal for either this article or our readers. Yet these are far from ordinary times for pension savings (and the employers that sponsor same). So what are these figures, and why are they important to our followers?

In a nutshell these figures capture the actions being taken by pension savers under the new, more flexible, Pension Freedoms rules that came fully online last year. Prior to this rule change the options for retirees with Defined Contribution pension savings were rather limited, whereas now those over age 55 have a much greater degree of flexibility with their savings and income options.

It is important that the Government monitors how such a rule change is being utilised by the savers that they are designed to empower. The FCA has therefore established a quarterly review of this process, and last week’s publication is the second in this series – and perhaps the first period to show any possible trends in this space given that the previous data included much pent-up demand from savers awaiting the introduction of the legislation in April 2015.

So what does the data tell us? As the FCA graphic shows there are some important statistics here.

The one that particularly caught our eye was the fact that less than one in three savers used their Defined Contribution funds to provide a pension. Yes – astonishing as this sounds – only 32 per cent of pension funds accessed were used to provide a 'traditional' retirement income. Of course some of these funds may well have been invested elsewhere to achieve an alternative retirement income stream – yet the suspicion remains that many will have been used for other financial needs.

Of the 68 per cent of funds that were fully cashed out (that’s the terminology used in the FCA publication), many were of relatively low value, with 57 per cent of those encashments being less than £10,000. Some might (rightly) argue that such small funds would produce only nominal levels of pension income under the annuity rates currently available, and these funds are therefore better used for other financial needs.

This may indeed by the case. Yet the concern would be that savers are not looking at their savings in the round. According to the previous Minister for Pensions, the average UK worker has seven jobs during their lifetime, and in a post-auto-enrolment world each job will probably generate another tranche of pension savings. The value of each may be modest, and when stood alone would produce little retirement income. Yet the combined value might present a very different picture.

As the old saying goes, many pebbles make a beach. And if UK savers start using up their savings pebbles early, then the retirement beach may not be a realistic possibility for many.  There are a variety of workplace implications for such an outcome – with potential disengagement and workforce stagnation perhaps the major issues.

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So although these figures are only an early indicator as to possible trends, they do highlight the need to educate employees, and those near retirement age in particular, regarding financial matters and pensions in particular.

For the full original article and other similar posts, please visit the Jelf Group blog.