Around 56 per cent of all pension pots accessed were cashed out in full, compared to 36 per cent that were in some sort of drawdown and 8 per cent that were used to purchase an annuity, according to data by the FCA.
According to the new ‘retirement income market’ data published by the FCA, within the October 2022-2023 period, there has been a 4.8 per cent increase in the number of people accessing their pension pots for the first time than in the previous period, from 705,666 in 2021/22 to 739,535.
Since the introduction of pension freedoms, the percentage of pots that are fully cashed out has continuously ranged between 50 and 60 per cent every six months.
But figures show that the monetary value was down and that the pots most likely to be cashed out in full are those of the lowest value. Around 205,000 pension pots were cashed out in full with around 137,000 being under £10,000 while 184,000 being under £30,000.
Sales of annuities fell from 68,514 in 2021-22 to 59,163 in 2022-2023, showing a 13.6 per cent decline. Meanwhile, defined benefit (DB) to defined contribution (DC) plan transfers fell even lower, from 26,619 in 2021/22 to 18,073 in 2022-2023.
Additionally, the data indicates that around 70 per cent of full encashments are made by individuals between the ages of 55 and 64, with the remaining 20 per cent cashing out prior to the age of 75.
However, the data only covers contract-based group and individual personal pension plans, stakeholders and other FCA-regulated pensions. It does not cover the circa 10 million workers saving in trust-based arrangements. The Pensions Regulator does not publish equivalent data.
For the most comprehensive data on withdrawals from trust-based DC schemes, see Corporate Adviser’s Workplace Pensions Into Retirement Report, which shows that more than 80 per cent of pots were fully cashed out amongst the largest providers.
LCP partner Steve Webb says: “These figures highlight the fact that hundreds of thousands of people reach retirement each year with very small pension pots. These pots would generate very little regular income if spread out over the decades of retirement. Instead, the majority of people still judge that the best thing to do is to cash out their pension and enjoy some additional cash at the start of their retirement.
“But with dwindling numbers of retirees having Defined Benefit pensions to fall back on, we urgently need to boost pension pots to a size where it makes sense to keep them rather than cash them in. With every new set of figures we see the consequences of the government’s delay in expanding automatic enrolment and the need for urgent action to get Britain saving more for retirement”.
Nucleus Financial Technical Services Director Andrew Tully says: “The effects of the cost-of-living crisis will, unfortunately, be felt for years to come, so it’s no surprise to see greater numbers of people making withdrawals from pensions than in the previous tax year. We have recently conducted some consumer research which revealed that 74 per cent of UK adults cite ‘affordability’ as one of the issues that negatively affects their retirement confidence. That figure rises to 81 per cent of those aged between 45-54. Many people need to access their pension while still working to pay unexpected bills or help wider family.
“Drawdown will remain the key retirement solution for many as it gives the flexibility to cope with changing needs in retirement. Given the ongoing freezing of the tax thresholds, being able to vary income to ensure it is taken as tax-efficient as possible is a key benefit. The increase in annuity sales isn’t a surprise given the significantly higher rates. But blending drawdown with a guaranteed income may give a better outcome than solely using an annuity.
“Given the range of retirement options available, it is important consumers get good advice at the point they first access their pension savings and on an ongoing basis to work out the best options for their individual circumstances.
“Drawdown advice can be complex, covering areas such as sustainability over a long time period; the ideal investment options; and tax advice, including how to pass on wealth efficiently to family. Advisers need to be clearly documenting their advice as that is one of the areas the FCA focused on during its retirement income advice review.”