British workers reaching retirement have proved to be more prudent than many believed they would be after receiving new pensions freedoms a year ago.
The pensions minister at the time, Steve Webb, said pensioners could buy Lamborghinis should they wish to do so after the rules forcing people to buy annuities were swept away in April 2015. This fanned fears that pensioners might blow their cash on cruises or pour it all into buy-to-let properties.
A year later, however, six out of 10 pensioners are withdrawing money from their pension pots at a rate of around 4% a year.
The Association of British Insurers said: “This new data indicates the majority of savers are taking a sensible approach, with 57% pots with 1% or less withdrawn during the last quarter.”
A total of about £4.3bn was taken out of pensions in cash, with many people taking advantage of the 25% tax-free cash lump sum on withdrawal. The average cash payment was £14,500.
The ABI said, however, that a small minority may be taking too much money out of their pension scheme too soon. One in 25 pensioners took 10% out of their pension pot in the last quarter alone, equal to 40% over a year.
Annuity sales have taken a hammering, falling from a peak of £12bn before the new freedoms to £4.2bn in the year to the end of April 2016, and they are expected to fall further in 2016-17. With falling interest rates and gilt yields cutting the incomes they offer, their appeal has taken another blow since the Brexit vote.
Most of the money that previously went into annuities is now lying as cash in people’s pension plans, or has been transferred into so-called drawdown plans that allow pensioners to choose when to take out their money.
Drawdown sales were £6.1bn in the year to April 2016, with the typical saver putting £67,500 in to their scheme.
“The data shows that the freedoms have been implemented successfully, and are working as intended. More than half of pots are having less than 1% withdrawn a quarter, which seems to indicate that most people are taking a sensible approach,” said the ABI’s director, Yvonne Braun.
“However the data also suggests a minority are withdrawing too much too soon from their pension pot … this is a warning sign that requires further investigation.”
The ABI added that the recent cut in the Bank of England base rate and the introduction of further quantitative easing will place even more pressure on annuity sales.
