53% of pension pots accessed under the pension freedoms have been fully withdrawn

Pension Kilner Jar

More than half (53%) of pension pots that have been accessed through the pension freedoms since their introduction in April 2015 have been fully withdrawn, according to research by the Financial Conduct Authority (FCA).

Its Retirement outcomes review: interim report, which is based on consumer research, retirement income data, sales data, behavioural research, and stakeholder interviews, also found that 72% of pension pots have been accessed by individuals under the age of 65.

The research also found:

  • 94% of individuals who fully withdrew their defined contribution (DC) savings through the pension freedoms had other sources of income. The most significant sources of income for these individuals include a defined benefit (DB) pension (24%), a state pension (21%), and other DC pension schemes (10%). Only 3% of consumers identified their withdrawn pension pot as their most significant source of retirement income.
  • 90% of the pension pots that have been full withdrawn since April 2015 have a value below £30,000, and 60% have a value below £10,000.
  • 64% of the DC pension pots that have been accessed through the pension flexibilities to date have been smaller than £30,000.
  • 30% of drawdown plans were purchased without advice, compared to 5% before the pension freedoms were introduced.
  • 32% of individuals who withdrew their whole pension pot through the pension freedoms put the majority of the funds into an individual savings account (Isa) or a savings or current account, and 20% invested in capital growth, such as buying property or business stocks and shares (20%). A quarter (25%) spent the money on items such as a car or home repairs, and 14% used the funds to pay off debts.
  • 10% of individuals use the information sent by their pension provider when making a decision about their pension pot.

Christopher Woolard, executive director of strategy and competition at the FCA, said: “Since the introduction of the pension freedoms, the retirement income market has changed substantially. This study looks at what has happened during this time, and gives us an early view of areas to keep a close eye on.

“We have identified areas where early intervention may be needed, either now or further down the track, to put the market on the best footing for the future. Ensuring this market works well will require cooperation across government, regulators, the industry, and consumer bodies. We will work closely with stakeholders to make sure we are clear on the actions we are best placed to lead.”

Claire van Rees, partner at law firm Sackers, said: “The FCA’s interim report makes for worrying reading. One of the few encouraging findings is that people don’t seem to be freeing their pensions savings to buy Lamborghinis. However, many people are choosing to move into drawdown to access their tax-free cash, without taking advice, without shopping around, and without necessarily giving appropriate consideration to where best to invest the rest of the fund.

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“Others with smaller pots are taking out the whole of their fund, often to put much of it into other savings without appreciating the disadvantages of this compared with leaving it in a pensions vehicle. Mistrust in pensions fuelled by the prevalence of negative news stories and concern about frequent changes in pension rules is cited as a key driver for such behaviour. The pace of policy change is also identified as a reason why there hasn’t yet been much innovation in the market for retirement products post-pension freedoms. The government would be well advised to stop tinkering with pensions taxation, or risk further reducing confidence in pensions.”

Tim Middleton, technical consultant at The Pensions Management Institute (PMI), added: “That 30% of DC retirees are going into drawdown without having sought professional advice is grounds for serious concern. The government should consider making advice mandatory for those with pots in excess of a set threshold. We are moving into an era where an increasing number of people are largely or wholly dependent on defined contribution pension arrangements to fund their retirement. Given the growing reluctance of members to opt for the security provided by annuitisation, it is crucial that drawdown is controlled prudently if longevity risk is to be managed effectively.”