The Daily Telegraph - Saturday - Money
Pensioners resist urge to splash the cash
The pension freedoms would encourage them to buy Lamborghinis, some feared. They needn’t have worried, says Ed Monk
Predictions that wastrel pensioners would use the new freedoms to blow their retirement savings look wide of the mark after industry figures showed that the majority of withdrawals were at prudent levels. The Association of British Insurers (ABI), whose members administer the majority of “defined contribution” schemes, published figures detailing withdrawals since the relaxation of pension withdrawal rules in April 2015.
They showed that, in the first quarter of 2016, from a total of 79,734 withdrawals, 45,641 were for sums below 1pc of the total value of the saver’s fund. Withdrawal rates are not available for previous quarters but, assuming the rates were similar, it suggests that at least half – 57pc – are withdrawing sensible sums.
Financial advisers often recommend that annual withdrawals should be less than 4pc to avoid dangerous depletion of capital and to give the fund a decent chance of lasting for 30 years, based on the historic performance of assets. Withdrawing 1pc or less each quarter would be within these limits.
It still means a worrying proportion of withdrawals – 43pc – were potentially for sums above 4pc. Some 4.2pc were for sums greater than 10pc.
It cannot be said with certainty, however, that these retirees have withdrawn unsustainable sums because individuals may have multiple pots, from different employers, for example, or income from defined benefit pension or other investments.
The pension freedoms give those with defined contribution savings greater flexibility over how they spend their pot.
Money can be taken out in lump sums, with 25pc of each withdrawal tax-free, leaving the remainder invested inside the scheme, or 25pc of the whole fund can be taken tax free and then further withdrawals can be made through “drawdown”. In this case recipients pay income tax at whatever rate the income takes them to. The ABI reported that, in the first year after the reforms were enacted, £4.3bn had been withdrawn in 300,000 lump-sum payments, with an average withdrawal of £14,500, while £3.9bn has been taken out via 1.03million drawdown payments, with an average payment of £3,800.
The changes in the rules free retirees from the obligation to buy an annuity – where rates of return are at record lows – in order to generate a retirement income. Sceptics had predicted that savers would withdraw unsustainable sums or blow their money on frivolities.
Before the introduction of the freedoms, the then pensions minister, Steve Webb, said he was relaxed about how pensioners spent their savings – even if they used them to buy a Lamborghini sports car.
Tom McPhail, the head of retirement policy at Hargreaves Lansdown, an investment shop, said: “The ABI data backs up evidence from elsewhere that the vast majority of pension savers are using the new freedoms well and making sustainable long-term retirement income decisions.”
There was worrying news, however, on annuity sales. Over the past year, only a minority of purchasers, 41.5pc, chose an annuity from a company other than the one that ran their pension savings. Switching away from your original pension provider is typically the best way to get the most competitive annuity rate.
Of those who did not switch, around half would not have benefited from switching because they were entitled to a higher “guaranteed” annuity rate from their pension provider, the ABI said.
‘The vast majority of pension savers are using the new freedoms well’