Alert as savers use pension to fight cost crisis

PENSION savers are risking a “cliff-edge drop” in living standards as latest figures show many could withdraw cash from their retirement savings at an unsustainable rate and run out of money in later life.

Almost 750,000 savers withdrew money from their pension pots in the 2022/23 tax year, as they tried to survive the cost-of-living crisis, according to the latest Retirement Income market update from City regulator the Financial Conduct Authority (FCA).

Over-55s were allowed to make cash withdrawals under 2015’s pension freedom reforms, despite fears that many could deplete their savings and struggle later in life.

New FCA figures show savers accessed 739,535 pension pots for the first time in 2022/23, a rise of 5 per cent from 705,611 the previous year.

The numbers cashing in their pension pots increased by around 6 per cent, from 395,235 to 420,727, with the cost-ofliving crisis a key factor.

Richard Sweetman, senior consultant at Broadstone, voiced concern as four in 10 plans saw withdrawals of 8 per cent or more. “That is substantially higher than the 4 per cent ‘rule’, which is typically assumed to be a safe withdrawal rate.”

Savers who take more than 4 per cent a year risk draining their savings too soon, he added. “It is vital pensioners access their pots sustainably to avoid a cliff-edge drop in their standard of living in later life.”

Kirsty Anderson, retirement specialist at wealth manager Quilter, said the overall value of money withdrawn from pension pots dipped 5 per cent to £43.2billion but was still high. “The rising costs of energy and food made people dip into their retirement funds to stay afloat.”

Fewer than one in three took financial advice before making withdrawals, down on last year. The numbers booking free, government-funded Pension Wise appointments explaining their options also fell. Anderson said more people need to get help as pension withdrawals are “one of the biggest financial decisions they will ever make”.

AJ Bell director’s of public policy, Tom Selby, warned that a large withdrawal could trigger a tax bill that could be avoided by drip-feeding withdrawals. “The risk of being dragged into higher tax bands has been increased by the government’s deep freeze of income tax thresholds.”

Accessing taxable income from your pension flexibly risks triggering the money purchase annual allowance, which reduces the amount you can invest in a pension in future to £10,000 a year or less. “It also revokes your ability to ‘carry forward’ unused allowances from the three previous tax years.”

FCA figures also showed a 13.6 per cent drop in annuity sales to 59,163 in 2022/23, despite higher interest rates and Selby said: “Savers continue to choose retirement income flexibility and choice over a guaranteed income for life.”

While pension freedoms remain popular Selby urged savers to use them carefully.