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.
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.
- Read more of The Greybeard’s articles on pensions and deaccumulation.