The biggest potential downside to the pension freedoms last April was the possibility that people would withdraw too much too soon from their pension funds, depleting them before time.
Therefore, I imagine that few of us are very surprised by recent figures from the Association of British Insurers (ABI) which reveal that some savers are draining their pension pots early.
However, neither is it a surprise that, according to the ABI, most savers over 55 are taking “a sensible” approach. Despite the freedoms, we are told that retirees are not unlocking their entire pension pots but instead are modestly withdrawing around 4% a year. In fact, 57% of pension pots have seen withdrawals of 1% or less during the last quarter. This marries to our own experience that clients who build pension funds tend, characteristically, to be relatively prudent and unlikely to cash them in without taking advice.
It has not been compulsory to buy an annuity since April 2011 so now it is indeed excellent news that, one year on from the introduction of pension freedoms, research is telling us that the freedoms are doing well.
It appears the ABI suspects that the four per cent of pots which have had 10% or more withdrawn over the first quarter of this year may belong to a minority of people with multiple pots or other sources of income. However, this cannot be assumed to be the facts of the matter and the ABI is to be lauded for stating its intention to investigate these cases further in order to build up an accurate picture. This is the responsible approach. The ABI’s call to the regulators and the Government to work with stakeholders to keep abreast of who is withdrawing pension fund money and why, should be supported.
It is exactly this knowledge that our sector needs. Acting upon it purposefully and conscientiously to protect consumers will, in turn, help to enable more innovation. After all, forewarned is forearmed.
Pensions must evolve by necessity. This is clear when we consider that in 2010 a 65-year old man could expect to live for another 21 years and a woman for 23.7, but in 2051 they would be predicted to live a further 25.9 and 28.3 years respectively. Time spent in retirement is steadily rising and pensions need to adapt.
Pension freedoms provide options and flexibilities; clients can leave their money invested in their pots until they need it. The ABI’s pronouncements are sensible and encouraging and we should take note and play our part in making sure people exercise their freedoms wisely.