Pension freedoms: five years of greater choice

Next April, we will reach the magical five-year anniversary for pension freedoms. But, although these rules are now established, we are still learning exactly how people are using their choices and working out what that means for their financial futures.

In this quest, the regular supply of published FCA data is invaluable. Its latest offering is no different, showing that in the 2018/19 tax year just over 645,000 pension plans were accessed – to buy an annuity, move into drawdown, or take a first cash withdrawal.

From the data, I think three key themes emerge.

1. The majority of plans accessed are fully withdrawn

The headline that over half (55%) of the plans are fully withdrawn could send a shiver down the back of anyone interested in pension policy. However, there are some mitigating factors. The bulk of these are small pots – 90% were less than £30,000 in value. This means there is less risk of people being pushed up into higher tax brackets and being hit with huge unnecessary tax bills. But of course, some would have suffered this, and may be in the position that they are reclaiming tax paid from HMRC, or simply waiting until the next tax year when this would hopefully be sorted out.

When considering this data, it’s difficult to take a firm stance on the results. We don’t know the financial position of those fully withdrawing these pots. We don’t know if they do so with a large defined benefit plan in the wings, or other significant savings – or if they are withdrawing the only pension money they have saved and intend to spend it now.

One other factor to take into account is that over three quarters of people fully withdrawing their pension plans are under state pension age, which implies that the money is to be spent now rather than used to meet later life income needs.

2. The shift to drawdown remains significant

The FCA figures emphasise the enduring popularity of the pension freedoms, with almost three people taking a regular income through drawdown for every one person buying an annuity. This represents a monumental shift in retirement behaviour since 2015, the impact of which will be felt across the UK economy.

One definite trend is that those with larger pension pots are more likely to choose drawdown than any other method of access. The average pot size was £147,500 for those choosing drawdown, compared to £61,000 for those buying annuities. And 75% of pots over £100,000 went into drawdown (85% of those with values over £250,000).

The FCA data examines withdrawal rates from income drawdown plans. One slightly alarming feature is that withdrawal rates of 8% or more is the most common rate across all pot sizes (except for the largest pots of £250,000 and above – where the most common rate was 2–4%). Again, it’s difficult to make any reasoned judgements on the sustainability of these withdrawals without the full knowledge about why people are making these sort of withdrawal decisions and how much in assets they have backing them.

3. We need to encourage more people to take advice

Just over half of the people accessing their plans took advice or guidance – 37% took regulated advice and 15% received guidance from Pension Wise. Those least likely to get help were those fully withdrawing their pot (only 38%) compared to 66% of drawdown customers who got regulated advice plus another 9% who asked for guidance from Pension Wise.

It’s clear far too few people are seeking advice or guidance about crucial retirement decisions across the board. As we learn more about the trends of pension freedoms and begin to see the consequences of previous actions being played out in reality, boosting these numbers needs to be a priority for the regulator. Otherwise, some will use their new found flexibility responsibly, whilst others risk sleepwalking into disaster. Increasing take-up of advice and guidance is crucial to help mitigate this risk.

Senior Technical Consultant

Rachel is a Senior Technical Consultant helping financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients. She’s well known within the pensions and savings industry, and regularly speaks at AJ Bell events, alongside writing content and articles for our website.