The Association of British Insurers (ABI) has warned that some people are withdrawing too much from their pensions too soon, a year on from the introduction of ‘pension freedoms’.
The ABI said its new data suggests that the majority of savers are taking a sensible approach, with 57% pots with 1% or less withdrawn during the last quarter. However, it wanted that there are signs a minority may be withdrawing too much too soon and at rates that would see their money run out in a decade or less, if they are reliant on their pension pot as their main source of income.
In the last quarter, 4% of pots had 10% or more withdrawn, and many others are taking their whole pot in one go. However, the ABI says it cannot identify from the data whether these savers may have multiple pots or other regular income.
In the most recent quarter, sales for guaranteed income for life (annuity) products have fallen, with £950m invested, compared to £1.1bn last quarter. Sales of flexible retirement income (drawdown) products remain consistent, with £1.48bn invested, compared to £1.49bn the previous quarter.
Overall, in a complete year since the reforms, the figures show for pay-outs that £4.3 billion has been paid out in 300,000 lump sum payments, with an average payment of £14,500, and £3.9 billion has been paid out via 1.03 million drawdown payments, with an average payment of £3,800.
Since the reforms came in, for funds invested in new products: £4.2 billion has been invested in 80,000 annuities, with an average fund of £52,500 and £6.1 billion has been invested in 90,700 drawdown products, making the average fund invested nearly £67,500.
Over the last year since the reforms were introduced, 41.5% savers switched when buying an annuity. Other savers may have looked at different providers and chose to stay with their existing provider who could have offered favourable rates, and new data shows around half of internal annuity sales, i.e where a customer did not switch, had a guaranteed annuity rate attached.
For drawdown, 53% chose to go with a different provider at the time they took money from their pension. Others will have transferred their pension before going into drawdown.
Yvonne Braun, the ABI’s director of policy, long-term savings and protection, said: “This is our most detailed analysis of customer decisions to date following the introduction of the pension freedoms. The data shows that the freedoms have been implemented successfully, and are working as intended. New data released shows that more than half of pots are having less than 1% withdrawn a quarter, which seems to indicate most people are taking a sensible approach. However, the data also suggests a minority are withdrawing too much too soon from their pension pot – 4% of pots are having a tenth or more withdrawn – and many other customers are taking their entire pot in one go.
“There may well be other factors at play here, such as people having other retirement income, for instance, final salary pensions or multiple pots. But this is a warning sign that requires further investigation. We need a full picture of these customers’ circumstances and income, which is something we urge regulators and the government to work with all stakeholders to examine.
“The fall in annuity sales in the most recent quarter reflects ongoing pressure on rates, which will not have been helped by the recent decision to lower interest rates to a 300 year low, and further quantitative easing measures.”