Three reasons why people are accessing pensions

For some advisers’ older clients, this last year has thrown into sharp relief the question of what to do with their – often – substantial pension pot.

They have had rumours and half-substantiated claims coming at them from all angles – whether it’s speculation about a cut in the maximum tax-free cash, or panic about their pension savings being subject to an inheritance tax raid.

It’s becoming increasingly obvious that this maelstrom of pension ‘noise’ has influenced some to take action, and the latest FCA data on retirement income paints an interesting picture on how and when people are accessing their retirement income amidst this confused environment.

Here are three key takeaways from the research, which was published in mid-September:

1. The amount of money being withdrawn has increased dramatically 
   Every year we expect more pension pots to be accessed. After all, defined benefit schemes are becoming a thing of the past, and more current retirees have a defined contribution pension pot. The year 2024-25 is no different; there was an increase of 8.6% in the number of pots being accessed for the first time.
   
   What was different though was that the amount of money being crystallised skyrocketed by 36% to £70.9 billion. This points to the increase not being about smaller amounts being cashed in; but rather more of those with bigger pension pots rushing to access.
2. The number of drawdown plans increased by over 25% 
   Over the past ten years of pension freedoms, most pension pots accessed for the first time are cashed in entirely. The FCA figures show that in 2024-25 very roughly the same number of pension plans were totally cashed in compared to the previous year. But the number taking drawdown had increased by over 25%.
   
   A deeper dive into the figures shows that the number of pension pots valued at £250,000 or more entering drawdown increased by 68%, suggesting that individuals with higher-value pensions are making changes. Additionally, the data could be argued to support the theory that some chose to crystallise to 'preserve' their tax-free cash, as there was an 85% rise in cases where only a pension commencement lump sum (PCLS) was taken and no income withdrawn from pots exceeding £250,000.
3. It’s not just tax-free cash 
   The FCA is keen to understand how much money people are withdrawing from their drawdown plans. Most customers taking a taxed income from drawdown are taking a withdrawal rate of 8% or more, and the proportion of those taking this higher rate has edged up from 42.7% in 2023-24 to 44.9% last year.
   
   In some ways a high withdrawal rate is understandable; almost 80% of pots under £30,000 were taking this higher rate. However, 14% of the pots worth £250,000 or above were also opting for 8% or more withdrawal rate, raising questions about the sustainability of their pension savings to cover their retirement.

The data can paint a picture of how people are accessing their pension savings in the mid-2020s. But as always, a hefty dose of common sense needs to be used when viewing the canvas. The FCA presents its findings through the prism of individual pension pots, whereas to get a better sense of what people are doing with their money we need to look at it from the viewpoint of the individual. For example, taking an 8% withdrawal rate on one pension pot may make sense if you are leaving the other three untouched.

Hopefully FCA can work with government to get us this more nuanced picture. But in the meantime, it’s becoming increasingly obvious that more people with larger pension pots are taking steps to access them.