Pension fund withdrawals very worrying, say experts


By Brian Milligan
Personal Finance reporter

Figures from the City regulator show that 120,969 who cashed in a pension fund between July and September last year took the whole lot out.

In contrast just 58,021 people used the money to buy themselves an income, said the Financial Conduct Authority (FCA).
But some people cashing in their pots may have invested it elsewhere – in property, or an ISA, for example.

The majority of these taking out cash – 88% – had savings of under £30,000, which would have bought them a relatively small income.

Of those people taking an income from their funds, 84% were taking a yield of less than 4% – considered to be a prudent amount to prevent running out of money before they die.
However, more than 24,000 took an income worth more than 10% of their savings, a level that is considered unsustainable in the long run.

‘Not working’
“Many aspects of the freedoms are working very well but there are aspects which give cause for concern,” said Tom McPhail, retirement specialist at Hargreaves Lansdowne.

He said income withdrawal rates were “mainly at a prudent level”, and people had not been put off buying annuities.
The FCA figures showed that 13% of people taking money out of their funds bought an annuity between July and September.

Many in the industry had worried that people would be put off buying an annuity – an income for life – as a result of the pension changes introduced in April 2015.

However, 64% of annuity-buyers were sticking with their existing provider, rather than shopping around to get the best deal.

In this respect, “market competition appears not to be working”, said Tom McPhail.
John Perks, managing director of retirement solutions at insurance company LV= described the figures as “extremely worrying”.

“This means most retirees are missing out on getting the most from their retirement savings, and we believe we are on the cusp of a pensions mis-buying scandal,” he said.

Guaranteed rates
The FCA figures also show that relatively few people are using the government’s free advice service.

Just 17% of those withdrawing money from their savings pots used Pension Wise in the three month period.

“This is concerning as they would likely have been subject to a substantial tax hit on the withdrawal and there is the potential that they did not fully understand the tax implications of their decision,” said Jon Greer, pensions technical expert at Old Mutual Wealth.

Those taking money from their pension pot after the age of 55 are allowed to take 25% of it tax free, but the rest is subject to income tax.

The Treasury pointed out that two million people people have visited the website.

A spokesman said it thought the system was working well: “Our pension reforms have given people real freedom and choice over how they access their retirement income and the government is ensuring that this new system works in practice and that the market is delivering for consumers.

“We encourage people to shop around and understand their options before making a decision, that’s why we set up the free and impartial pension wise service.”

The FCA data also suggests that many people are failing to take advantage of so-called Guaranteed Annuity Rates (GARs). These pensions typically promise to pay out an income of as much as 10% a year of the value of the pot, relatively speaking an excellent return.

But 68% of those who could have qualified for a GAR, had they waited until they were old enough to claim it, did not do so.


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