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Deaccumulation and the new pension freedoms: what real-life retirees are doing

The Greybeard is exploring post-retirement investing in modern Britain.

The Christmas mail brought a pensions update from a former employer, a FTSE 100 engineering company.

In four years’ time, it proposes to pay me around £5,500 each year.

Not bad going for a job that I was in for just five years, and which I left in 1983.

What was especially interesting, though, was the half-page of information devoted to warning people about the various pension scams going the rounds, with murky companies apparently offering dubious ways to ‘liberate’ pensions and provide early access to funds.

So avoid cold-callers or website pop-ups offering ‘a free pension review’ or ‘legal loophole’, it advised – and be especially cautious of overseas money transfers or paperwork delivered to your door by courier, requiring an immediate signature.

Even when outright theft isn’t the objective, it added, so-called pension liberation can still see retirement savers hit by usurious fees and commissions, sometimes amounting to a third of their pension savings.

These are, indeed, shark-filled times.

Take care out there.

Freedom versus responsibility

But is Chancellor George Osborne one of the biggest sharks? Or, if not an actual shark, at least helping to encourage the feeding frenzy?

Because data crossing my desk certainly points me in that direction.

Yes, the 2015 pension freedoms have done much to put retirees in the driving seat, giving them more control over how they access their pension savings.

But control isn’t always exercised responsibly. And to borrow an analogy from former Lib Dem pensions minister Steve Webb, if you put just-qualified 17-year old drivers behind the steering wheel of one of Webb’s famous Lamborghinis, you’re going to get a certain number of car crashes.

Now, call me old-fashioned, but as a (hopefully) responsible parent, I can’t help but think that while the 17-year old deserves a lot of the blame, the person who handed over the keys should not be beyond reproach, either.

Spend, spend, spend

There’s a popular perception that George Osborne’s pension reforms arrived fully-formed, rather as with Moses and the tablets.

In fact, they have their roots in similar freedoms granted to retirees in a number of overseas countries.

And a report from the (admittedly left-leaning) Social Market Foundation has examined how those freedoms have worked in practice.

It makes for sobering reading.

In Australia, for instance, four out of ten Australians with pension savings had spent them all by the age of 75.

Americans, meanwhile, typically withdrew at an unsustainable rate of 8% a year – double the 4% many observers recommend.

To the Foundation, this is a warning that the same thing could happen here, throwing destitute retirees onto the mercies of state benefits – although, as I’ve pointed out, those mercies can’t be guaranteed.

At last: hard facts

So how are Britain’s retirees handling their now-found pension freedom?

In the weeks following last April, a number of financial providers and commentators issued bulletins on the proportion of new retirees cashing-in their pensions, often incurring a hefty tax charge in the process.

Nor were these withdrawn funds necessarily reinvested elsewhere. Anecdotally, a proportion of pension savings seem to have been spent on paying off debt, holidays, and new cars and kitchens.

But hard facts, drawn from across the market, have been missing.

No longer.

On 7 January, the Financial Conduct Authority (FCA) – the successor body to the old Financial Services Authority – published its latest Retirement Income Market Data survey, covering the second three-month period that the new freedoms have been in place.

Adding a further 178,990 retiree data points to the 204,581 retirees who accessed their pension pots in the April-June quarter, we can now see how almost 400,000 real-life pension savers have made use of Mr Osborne’s freedoms.

Why the especial significance of this second quarter of data? Because it’s likely to be cleaner data than the first quarter, given that the first quarter’s data is anomalous, combining:

  • Pent-up demand from savers determined to withdraw everything and consequently delaying their pension decision until the freedoms came in;
  • Under-informed pension savers who lacked the education that has since started to emerge from more informed advisers, more (and better) media exposure, and the government’s new Pension Wise service; and
  • A number of known data collection errors in the first quarter’s data.

What we’re all doing

So what do these hard facts add up to? Let’s take a look:

  • Overall just 13% of retirees elected for the annuity route – a very sharp reversal of the annuity industry’s past fortunes. But the proportion of annuity purchasers shopping around for an annuity actually fell, which is both disturbing and odd.
  • Instead, the greater proportion of retirees (34%) chose to access their pension savings through the new Uncrystallised Funds Pension Lump Sum (UFPLS) route to taking pension benefits. Of the options on offer, that’s probably the smartest, and the one that’s probably of the greatest appeal to Monevator readers.
  • A further 23% of pension savers fell into the £30,000 ‘small pot’ bracket, and so took the lot as cash. This group accounted for 88% of the total number of full withdrawals, with a massive 57% of full withdrawals being pension pots of less than £10,000 in size. Even so, many of those individuals with £10,000+ pension pots will likely have been hit by a thumping tax charge, assuming average earnings.
  • In terms of income withdrawal, including both UFPLS and income drawdown retirees, almost three-quarters (71%) of those accessing their pension pot took an annual income of less than 2% of their fund. A further 13% took an income of 2-3.99% of their fund.
  • 12% of those individuals making full withdrawals had pension pots valued at above £30,000. Somewhat incredibly, roughly 1,200 people fully cashed-out pension pots of £100,000-£149,999 in value, suffering a significant tax hit in the process. (Did these people take Steve Webb literally?)

Mine, all mine

On the face of things, then, in the vast majority of case, Australia this isn’t.

Except that for the fact that while most retirees appear to be sensible, a significant minority buck the trend.

  • Over the quarter, one in ten of those accessing their pension pots (10%) took a rate of income withdrawal of 10% or more of the value of their pot. That isn’t a sustainable rate of annual income withdrawal, for sure – unless such retirees are in their eighties.
  • Which seems unlikely, because it was individuals aged 55‑59 who took the highest rate of income withdrawal, with 27% of those individuals aged 55‑59 taking an income of 10% or more of their pot after any tax free cash was deducted. Again, this isn’t sustainable, and these individuals’ retirement prospects look set to hit the buffers. Perversely, the higher the individuals’ age, the more prudent their income withdrawal rates.
  • The proportion of individuals making full withdrawals (and taking a likely tax hit, to boot) is worryingly high. 31% of those making full withdrawals had pension pots valued at between £10,000 and £30,000, and 12% of those individuals making full withdrawals had pension pots valued at above £30,000. And £100,000+ withdrawals are not a fantasy: it is happening.

What to make of it all?

Clearly, the FCA has further work to do in refining its data collection methods. At several points in the report there are evident data collection ambiguities, which the FCA acknowledges.

It’s also — frankly — not the clearest-written of reports, which again doesn’t help.

So if anyone from the FCA is reading this, I can be contacted via the comments box below, and my rates are reasonable.

Overall, though, the picture is moderately encouraging.

Most people are being sensible, and most people are doing something other than a) withdraw the lot, or b) hand it over to an annuity provider.

But the fact remains that a significant minority of people are heading for what appears to be a penurious old age.

And while some of you reading those words might not mind this too much, a central plank of past government pension policy has always been to protect people from themselves.

Now we are seeing why.

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{ 32 comments… add one }
  • 1 Neverland January 14, 2016, 10:40 am

    The people withdrawing relatively small pots to spend are being rational as they are betting either/both:

    – they can find work at the new higher minimum wage
    – the government will continue to fund the triple lock and other pensioner benefits

    Its certainly been a winning bet since 2010

    Personally I expect the triple lock to be consigned to the bin by the end of the next decade and I’m not too sure about a £9-an-hour minimum wage being viable outside of the south east

    Interesting the house of commons committee on work & pensions announcing an enquiry into inter-generational unfairness today

  • 2 Kraggash January 14, 2016, 11:13 am

    Those taking a high rate of withdrawal from their SIPP etc could well be putting it into ISAs, from which investment gains/div. income will be tax free. Best to do this before you take your SP to maximise use of annual tax-free allowance.

  • 3 John B January 14, 2016, 11:55 am

    What isn’t clear is what other sources of income these people have. The last thing we want is the government imposing nanny withdrawl restrictions based on partial data, considering the pension pots being cashed in as the entirety of their savings. Many people will be tidying up old schemes, or deciding on a high drawdown rate on one pension at 60, because another will kick in at 65, or they predict an inheritance.

    And those 1200 apparent madmen could have been diagnosed with only a year to live, or just have lots of cash.

    We don’t want the government constraining the majority because of a minority, nor forcing expensive financial reviews just to confirm sensible decisions.

  • 4 helfordpirate January 14, 2016, 12:17 pm

    “Instead, the greater proportion of retirees (34%) chose to access their pension savings through the new Uncrystallised Funds Pension Lump Sum (UFPLS) route to taking pension benefits. Of the options on offer, that’s probably the smartest, and the one that’s probably of the greatest appeal to Monevator readers.”

    However, 96% of those UFPLS were total withdrawals. The majority of consumers who left money in their pension used drawdown. If you look at the cohort analysis by pension size, the use of UFPLS also tails away very quickly as pots get over £50k and drawdown is by far the most popular.

    So I think that actually the Monevator cohort – at least on pot size, if not finance-savviness – is favouring drawdown.

    It is far from clear to me that UFPLS is the “probably smartest” option. Certainly for larger pots it introduces LTA issues; the argument about getting more tax-free cash is mute if you can re-invest your PCLS efficiently; it is more expensive and more paperwork (at lest for my platform); and it leaves you exposed to political fiddling with the PCLS %. The previous IHT advantage of phased drawdown which it effectively replaces also of course no longer apply.

  • 5 Neverland January 14, 2016, 12:19 pm

    @John B

    It isn’t nannying; the government on behalf of future taxpayers gave these people a generous tax break in the form of partial tax exemptions and deferrals so that future tax payers wouldn’t be burdened with welfare payments for them

    The government has a complete right to make sure people don’t throw away their money and become a burden on other taxpayers

    It may later be proved reckless for the government to have allowed full access to pension savings

  • 6 John B January 14, 2016, 12:39 pm

    @Neverland

    Aren’t people cashing in early paying more tax than they would by gradual withdrawl? While I agree people should consider their own priorities, I don’t see how they are wasting the government’s money. Anyway ‘waste’ is a difficult term in economics, as spending it benefits the rest of the economy, and even burning it just changes the money supply. Buying VATable luxuries generates tax revenue that basic food does not.

    The uncomfortable truth the FIRE community faces is that what the government wants is for everyone to do economically productive work while they still can, and don’t want to offer tax breaks to slackers. High income, high spending, high tax, low saving people who flip to state supported penury are preferable to those of us who how to get outside the system, even if we fund our old age.

  • 7 Jos January 14, 2016, 12:39 pm

    Concur with John B, e.g. how many of those taking a “tax hit” have other income that utilises their tax-free personal allowance, making irrelevant whether they take the hit in a oner or spread it over multiple years.

  • 8 Neverland January 14, 2016, 12:53 pm

    @ John B

    Yes many people pay more tax initially if they withdraw it all in one go than over a period of years – but what we cant see is the cost of benefits for years that they might have been otherwise self-supporting (rather than having motorhome in the drive for instance)

    The general point I keep making about “government’s money” is that the government has no money. it can either spend current tax payers money or borrow backed by future tax receipts

    I would rather they did not do the latter

    However I very much agree with your third point about the FIRE community not fitting in with the governments current plan for retirement at 70

  • 9 JW January 14, 2016, 2:11 pm

    I wonder whether the picture is as bleak as it is painted. Remember that this information comes from the FCA ‘s regulated providers, and that a provider of a pension pot can tell you what the individual die with that pension pot, but not whether they had other pots and what they did with them. Not all those decisions may be as foolish as they seem.
    You note that 27% of those individuals aged 55‑59 took an income of 10% or more of their pot after any tax free cash was deducted. and that the higher the individuals’ age, the more prudent their income withdrawal rates. This could well be me if I retire between 55 and 60: I have a reasonable slice of final salary pension that will kick in at age 60 and the state pension which will kick in at 66 or 67 or something. I think I could afford a higher draw rate in the earlier years and reduce it later, so I have a more even retirement income. Whereas for older savers who already have their other income sorted a more cautious approach would be wiser (and it seems is being adopted)
    I have several DC pots (which is not uncommon) and it might be an idea to take one or the smaller ones- around £40k- in one go and pay tax at 20% on the £30k in excess of the PCLS ( I can live with an effective tax rate of 10%) . This would avoid the potential costs and hassle of consolidating my pensions with a view to doing some form of drawdown of the whole pot.
    We are often told some people may only have around £35-40K in total in pensions. Why not take it all and use it to pay off mortgage and other debts, even get a decent reliable car, and maybe a holiday of a lifetime, and then live off the state pension, rather than dribble the pension out over the rest of their life (and pay more interest…)
    Of course there will be some idiots.. there always are. And some people have so much distrust in pensions that they will feel happier if they have taken all the cash even though it has been taxed. It is up to them if they are prepared to pay that cost. Cynical voices in the industry have been known to suggest that the reason for the freedoms is in fact precisely to accelerate tax receipts into this parliament to help George balance the books…

  • 10 RobWansbeck January 14, 2016, 2:32 pm

    I’m one of those individuals taking more than 10% per annum but most of it goes straight back into other pensions.
    Being fully retired I am limited to £2880 (net) into my pension but my wife is a non-taxpayer who still does some part-time work and we put her full salary into her pension after allowing for tax relief. As an example, someone on 10k can put 8k into a pension fund and the taxman will add 2k.

    On another point, we have two children still at university and student loans are based on income after pension contributions and not on savings. Taking money from a pension pot to place in an ISA might result in reduced grant payments so in our case we would be more likely to take money from an ISA and pay it into a pension.

  • 11 JR January 14, 2016, 2:49 pm

    Now I’m of the wrong generation to be paying too much attention to the detail of new pension freedoms but if I understand correctly those who have emigrated are no longer entitled to a tax free allowance (I’m unsure if the two different marginal rates apply). I would suggest an explanation for the 1,200 fully withdrawing high value pensions could be that they are emigrants who will pay the same or similar tax on withdrawal whether as a lump sum or as a trickle and are hence opting to take the hit upfront.

  • 12 oldie January 14, 2016, 2:58 pm

    Hi
    another issue which may important to some is the ability to pass pension funds to others, without tax, on death.
    Isa’s are now getting a slightly similar treatment.
    And increasing IHT threasholds.

    Managing capital and income together needs to be considered.

  • 13 gadgetmind January 14, 2016, 3:19 pm

    I’ve very pleased the nannying has stopped and I hope it doesn’t return. As a result of the new rules, my wife will be able to access all of her small SIPP (circa £50k) tax free before SP kicks in rather than a measly few percent each year. I’ll also be able to draw down harder on my pensions pre state pension and reduce the rate afterwards.

    With the old nannying rules of GAD + whatever percentage they dreamed up that morning, things would be much harder.

    I doubt the FCA have the data to let them understand why some people are doing what they regard as unsustainable for very sound reasons.

  • 14 Neverland January 14, 2016, 4:37 pm

    @gadgetmind

    “I’ve very pleased the nannying has stopped and I hope it doesn’t return.”

    No-one knows the effect of “pension freedom” yet

    It will only become obvious in a decade or twos time, as has been the case in Australia

    You might well wish the nanying hadn’t stopped when you have to pay higher taxes to pay means tested benefits to pensioners who depleted their funds to pay for an extension or a deposit for their kids to buy a house

  • 15 gadgetmind January 14, 2016, 4:43 pm

    No, I won’t wish the nanny was still in place at any point. The nSP is partly designed to remove means tested benefits, so those tiny few who blow their pensions will just have to live on nSP. But remember that people don’t empty their bank accounts and blow their ISAs, so why on earth would they fritter away their pension after carefully saving for decades?

    Meanwhile, myself and millions of others will have used the flexibility to bring our retirements forwards and make them more comfortable.

    We don’t want the nanny state in any shape or form so please don’t try and force it on people.

  • 16 John B January 14, 2016, 5:39 pm

    Taxpayers already subsidise the lifestyles of the lazy, the unhealthy, and the financially imprudent in other fields. I can’t see adding a few more who want to raid a pension nest egg would make much difference. The state benefit level is hardly generous to encourage a spending spree.

    The big issue is not so much small pensions but the huge cost of residential care. Very few can protect against that, and the first tentative attempts to cap costs have been delayed as the state realises it can’t fund it.

  • 17 JW January 14, 2016, 6:34 pm

    @JohnB don’t get me onto residential care and who pays for it. I am really upset at the idea that people’s homes have to be protected at all costs rather than used to pay for their long term care. The argument is sentimentally couched in terms of not forcing little old ladies to leave their homes but basically means using taxpayers cash to make sure that the little old lady’s kids can inherit a house, whether or not they need it. Completely unlevel playing field because if said little old lady had chosen to rent her home and build up valuable savings (eg in ISAs or pensions) those savings are not protected. see also new IHT allowance…

  • 18 John B January 14, 2016, 6:54 pm

    @JW I thnk IHT should have a single value and apply to all assets, including houses and pensions. All the complicated regulations produce inequality and distort the value of the asset, and we really don’t need higher house prices or house hogging just because they don’t attract the IHT of equities.

  • 19 Mikkamakkamoo January 14, 2016, 8:00 pm

    The worrying thing for me is the level of fraud that is going on relatively unnoticed via SIPPs and unregulated pensions.

    I don’t believe the full extent of this problem will be realised for another few years as many people don’t even realise they’ve effectively already ‘lost’ their pension fund until the point they try and take something out of it or transfer elsewhere. Ticking time bomb.

    But hey ho, not to worry, the inevitable miss-selling (or is that miss-buying?!) bill will be picked up by those innocent parties in the FS industry (via their FSCS levies) whilst the usual suspects get away scot free.

  • 20 gadgetmind January 14, 2016, 8:03 pm

    Set the IHT rate at a single value of 0% on all assets and the problem goes away. I know the looney left won’t like the idea of things people have worked hard for being kept in the family rather than being confiscated by the state, but we’ve already done that one!

  • 21 Mr Zombie January 15, 2016, 8:44 am

    @Greybeard

    Thanks for pulling together this summary – very interesting reading, for us PF nerds anyway 🙂

    It’s far too early to draw any real conclusions yet methinks. Nonetheless, I’ll put on my Raybans, the ones with the rose-tint;

    – Would be interesting to see more data on the smaller pots. Like others have said, some of it could well be people consolidation multiple smaller pots.

    – The majority of those taking a ‘drawdown’ type route are using a rate < 4%…which is encouraging and at leasts suggests that this should be sustainable.

    – "Somewhat incredibly, roughly 1,200 people fully cashed-out pension pots of £100,000-£149,999 in value" on the surface this does boggle the mind, why would you do it!? Hopefully more info will come out around what is happening here, I'm sure there's a good reason

    – I'm glad the proportion of retirees taking annuities is dropping given their poor value at the moment, perhaps people are getting wiser (and not greedier and just wanting it now).

    – There might well be a whole slug of people using their DC pension to plug the gap between retiring and getting access to their DB pension income or topped up by state income. So it may well be only a temporary unsustainable withdrawal rate.

    @Mikkamakkamoo your compensation point does worry me also. Also – part of the PRA/FCAs remit is to ensure customers also take some responsibility for their actions, which would be a better way to go IMHO. People vote with their hooves that way

  • 22 theFIREstarter January 15, 2016, 10:30 am

    That was the first thing I thought of, that many of those drawing down unsustainable percentages or taking full payment must have other sources of funding. There will always be the few that have not thought it through properly though. I guess we’ll find out roughly how many in 10-15 years time!

  • 23 theFIREstarter January 15, 2016, 10:34 am

    How many people took fully cashed out option on £150,000+ by the way? Or was that the limit?

  • 24 ermine January 15, 2016, 11:27 am

    I am one of these spendthrift punks who aims to consume their entire DC pension in five or six years years with an outrageous drawdown rate of 20% p.a., the delay being intended to keep it under the tax threshold.

    The story isn’t as ghastly as it seems because I’m burning it up ahead of another pension payable after those five years. So beware what you read into statistics. That’s not to say there won’t be a strategic problem in the long run as the number of people with DB pensions will drop as time goes on, but with pensions the general feeling is get it out ASAP if only to shunt some of it into ISAs, because increased taxation of pension income in the form of integrated NI and tax has to be the obvious win for some government somewhere along the line.

  • 25 gadgetmind January 15, 2016, 11:54 am

    @ermine – Your plan is clearly sane and well considered. However, anyone doing what the FCA has done will conclude “Danger! Call Nanny!” as they can’t see the bigger picture.

  • 26 John B January 15, 2016, 12:08 pm

    As TEE == EET, why wouldn’t anyone expecting to pay basic rate tax at all times (due to state and small DB pension/annuity) draw down at the maximum rate under the higher rate threshold. I’d try to realise £40k, pay £7.5k tax, live on £17.5k and put £15k in an ISA. It would remove the pension from government raids, but with the disadvantage that it would become liable for IHT.

  • 27 Richard January 15, 2016, 12:35 pm

    I’m in the same boat as Ermine

    In simple terms:

    Retire at 50.

    50 – 55 – live off savings

    55 – 65 – take c£15k pa from my SIPP with the 75% taxable amount using up my personal allowance.

    65/67 – state and company pensions kick in.

    In the background I have cash and ISAs to fund any extra spending I may have.

    If I have more in my SIPP than the 10 years I will need it for, I’ll take out the extra early on and put it into an ISA, as under this scenario the extra will be taxable whenever I take it. So I may as well do this early to avoid the possibility of the Govt changing the rules further down the line.

    Thus the SIPP will be withdrawn at a seemingly high/unsustainable rate, but only because it does not have to last me a lifetime.

    The only downside to this is that using up the SIPP this way is not good planning in regards to IHT. However I run a Me First financial plan.

  • 28 Rob January 15, 2016, 5:52 pm

    Worth noting those withdrawing £100k+ pots in one go may have terminal illnesses, or may now live overseas in countries with more generous income tax regimes. I’m sure some are just being reckless, but a few hundred for the entire country doesn’t seem particularly high to me. Smaller pots withdrawn rapidly may be due to individuals with multiple pensions being drawn sequentially.

    I’m with others above who hope that these incomplete stats don’t get seized on by those with an agenda to revert the pension freedoms. To me, the freedoms are a net positive.

  • 29 Kraggash January 15, 2016, 7:41 pm

    So far this year, it seems like something is doing the deaccumulation for me……!

  • 30 Planting Acorns January 16, 2016, 10:11 am

    @ermine… As time goes on I don’t think many people with DB pensions will also have DC ones…the ‘ever shrinking’ lifetime allowance will put paid to that

    I have a DB pension and do my saving into an ISA for that very reason…

  • 31 dearieme January 16, 2016, 3:30 pm

    “higher taxes to pay means tested benefits to pensioners who depleted their funds to pay for an extension”: let ’em do equity release before they’re paid any “benefits”.

  • 32 JW January 19, 2016, 12:48 pm

    @JohnB @Richard noted on the IHT inefficiency of moving funds to ISAs, but also agree on the Me First financial plan.
    Who knows what the IHT rules will be at the (hopefully distant) relevant date, but I think my kids will manage getting £650k to £1m free of IHT even if they only get to keep 60% of anything over that

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