More than half of people tapping pensions cash them out in full, new FCA figures reveal

More over-55s are tapping their pensions and over half are cashing them out entirely, new official figures reveal.

Nearly 740,000 pension funds were accessed in the 2022-23 financial year, up around 5 per cent from the year before, as people struggled to pay household bills in a period of rising inflation.

Some 56 per cent of pots are being cashed in full – the majority of them worth £10,000 or less, according to new data from the Financial Conduct Authority.

Meanwhile 36 per cent were invested in a drawdown plan and 8 per cent were used to buy an annuity in the year to October 2023.

Tapped: There has been a 5% rise in the number of pensions being cashed out, FCA data shows

Sales of annuities fell nearly 14 per cent to around 59,200, despite better deals coming on the market as interest rates started to rise.

However, recent industry figures covering the whole of 2023 suggest more savers are being tempted by a strong recovery in the guaranteed retirement income an annuity will provide.

Annuities were shunned for years due to poor rates and restrictive conditions, and after gaining a bad reputation on the back of mis-selling scandals.

The pension freedom reforms in 2015 prompted most savers to keep their funds invested and live off withdrawals instead, despite the financial market risk involved.

Meanwhile, the FCA’s new report showed a sharp drop in the number of people transferring out of final salary pensions – which like annuities provide a guaranteed income for life – into invested drawdown plans where the holder bears the investment risk.

Final salary schemes have slashed the value of the offers made to workers to transfer out, because the rise in interest rates has improved their ability to fund pensions over the long term.

Former Pensions Minister Steve Webb says of the figures showing most defined contribution pots are cashed in full: ‘These figures highlight the fact that hundreds of thousands of people reach retirement each year with very small pension pots.

‘These pots would generate very little regular income if spread out over the decades of retirement,’ adds Webb, who is now a partner at LCP and This is Money’s pensions columnist.

‘Instead, the majority of people still judge that the best thing to do is to cash out their pension and enjoy some additional cash at the start of their retirement.

‘But with dwindling numbers of retirees having defined benefit pensions to fall back on, we urgently need to boost pension pots to a size where it makes sense to keep them rather than cash them in.

‘With every new set of figures we see the consequences of the government’s delay in expanding automatic enrolment, and the need for urgent action to get Britain saving more for retirement.’

Paul Leandro, partner at Barnett Waddingham, says: ‘The FCA should not be surprised by the increasing levels of cash withdrawals from pension pots, but they should be worried.

‘Pension freedoms opened up Pandora’s Box – the temptation to draw cash rather than secure retirement income is great, especially in light of the cost-of-living crisis. 

‘Some withdrawals may be sensible and financially sound, where the individual has suitable resources – but most are not.

‘This is further evidence that we need to create a much more robust at-retirement framework. People need to be able to better visualise their income requirements in retirement, and there needs to be a tangible way to understand the knock-on effects of taking too much cash too early.

‘The current pension landscape looks dire. Not enough contributions going in, coupled with too much cash being withdrawn too early, makes for a very bleak future ahead.

‘Innovation is critical 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 plans with smaller pension pots have the greatest concentration of high withdrawal rates, it is concerning that more than half of plans are seeing regular withdrawals of 6 per cent or over.

‘Retirement adequacy is already a huge issue in this country, a concern that will only grow as more pension savers reach retirement with greater reliance on defined contribution rather than defined benefit provision.

‘It is vital that pensioners are accessing their pots sustainably, drawing an income that will meet their needs in retirement but also last throughout their late-life to avoid a cliff-edge drop in their standard of living.

‘It indicates that a sea-change in awareness, education and support needs to specifically targeted at those nearing the end of their accumulation journey to help drive informed decision-making taking into account factors like longevity, personal circumstances and retirement objectives.

‘The drop in annuity sales is a little surprising given that rates have improved. In future we might see a trend towards customers purchasing annuities later on in retirement, securing their essential income at higher rates given their advancing age.’

This post first appeared on Dailymail.co.uk