More than half of people who tap a pension pay it out in full, new FCA figures show

More and more people over 55 are using their pension and more than half are having it paid out in full, according to new official figures.

Nearly 740,000 pension funds were tapped in the 2022-2023 financial year, an increase of around 5 percent on the previous year, as people struggled to pay household bills during a period of rising inflation.

Around 56 per cent of pots are cashed in in full – the majority of which are worth £10,000 or less, according to new data from the Financial Conduct Authority.

Meanwhile, 36 percent was invested in a withdrawal plan and 8 percent was used to buy an annuity in the year to October 2023.

Annuity sales fell nearly 14 percent to about 59,200, despite better deals coming to market as rates began to rise.

However, recent sector figures for the whole of 2023 show that more savers are being seduced by a strong recovery in the guaranteed pension income that an annuity will provide.

Annuities were shunned for years because of poor rates and restrictive terms, and after developing a bad reputation due to mis-selling scandals.

The 2015 pension freedom reforms prompted most savers to keep their money invested and live on withdrawals instead, despite the associated financial market risk.

Meanwhile, the FCA’s new report showed a sharp fall in the number of people transferring their final salary pensions – which like annuities provide a guaranteed income for life – to invested withdrawal plans where the holder bears the investment risk.

Final salary schemes have reduced the value of the offer to workers to switch as the rise in interest rates has improved their ability to fund pensions in the long term.

Former Pensions Minister Steve Webb says of the figures showing most defined contribution pots are being fully cashed: ‘These figures highlight the fact that hundreds of thousands of people are retiring with very small pension pots every year.

“These pots would generate very little regular income if spread out over the decades of retirement,” adds Webb, who is now a partner at LCP and the retirement columnist of This is Money.

‘Instead, the majority of people still believe that it is best to cash out your pension and enjoy some extra money at the start of your retirement.

‘But now that the number of retirees have a fixed pension to fall back on, we urgently need to increase pension pots to a size where it makes sense to keep them rather than cashing them out.

‘With each new set of figures we see the impact of the government’s delay in expanding auto-enrolment, and the need for urgent action to help Britain save more for its pension.’

Paul Leandro, partner at Barnett Waddingham, said: ‘The FCA should not be surprised by the increasing number of withdrawals from pension pots, but they should be concerned.

‘Pension freedoms opened Pandora’s box – the temptation to withdraw money rather than secure a retirement income is strong, especially in light of the cost of living crisis.

‘Some withdrawals may be sensible and financially sound if the individual has the right resources, but most are not.

“This is further evidence that we need to create a much more robust framework for retirement. People need to be able to better visualize their income needs in retirement, and there needs to be a tangible way to understand the knock-on effects of taking out too much money too early.

‘The current pension landscape looks bleak. If not enough contributions come in, combined with too much money being withdrawn too early, the future looks very bleak.

“Innovation is critical to better support people’s decision-making – the best time was ten years ago, the next best time is now.”

Richard Sweetman, senior consultant at Broadstone, said: ‘While plans with smaller pension pots have the greatest concentration of high withdrawal rates, it is worrying that more than half of plans regularly experience withdrawals of 6 per cent or more.

‘Pension adequacy is already a major problem in this country, a concern that will only increase as more pension savers enter retirement and rely more on defined contributions rather than defined benefits.

‘It is crucial that retirees access their pots in a sustainable way so that they can earn an income that meets their needs in retirement, but can also last throughout their later lives, to avoid a dramatic prevent a decline in their living standards.

‘It signals that a massive shift in awareness, education and support must be specifically targeted at those nearing the end of their accumulation journey to encourage informed decision-making, taking into account factors such as longevity, personal circumstances and retirement goals.

“The decline in annuity sales is a bit surprising as rates have improved. In the future, we could see a trend of customers purchasing annuities later in retirement, securing essential income at higher rates given their advancing age.”