Savers withdrew £8 billion from their retirement pots in the first full year of pension freedoms, according to the Association of British Insurers. £4.3 billion has been taken in lump sums averaging £14,500 per payment, and a further £3.9 billion has been accessed using drawdown with an average withdrawal amount of £3,800.
Pension freedoms were introduced in April 2015, allowing every pension saver over the age of 55 access to their retirement savings. Before the freedoms were introduced it was compulsory to buy an annuity at retirement unless you could prove you could provide yourself with a considerable income through your retirement.
When the plans were announced by then Chancellor George Osborne in the March 2014 Budget there were concerns that a ‘Lamborghini culture’ would emerge, and pensioners would splurge their retirement savings on fast cars and holidays rather than sustainable investments to provide a multi-decade income.
But the first full-year figures from the ABI suggest that the majority of pension savers are thinking sustainably, with 57% of pots being accessed at a rate of 1% or less in the first three months of 2016. The majority of pots were at this rate – 45,641 of the 79,734 accessed. A further 16,134 accounts were accessed with a drawdown rate of between 1% and 1.99%.
Tom McPhail, head of retirement policy at Hargreaves Lansdown commented: “The ABI data backs up evidence from elsewhere, that the vast majority of pension savers are using the new freedoms well and making sustainable long term retirement income decisions.
“We have seen some fundamental changes in behaviour, with fewer annuities being sold but for higher values and more drawdown plans being used, with lower average values; these are both positive developments.”
Drawdown Rates: Not All Good News
However, thousands of investors are risking pension poverty by withdrawing too much too soon. With significant market volatility the new normal, and an uncertain macro backdrop for the UK, the 7,459 accounts which have had a drawdown rate of 4% or more are risking running out of cash.
Some 3,379 even took out 10% or more from their pension pots in the first year of pension freedoms.
David Newman, head of Pensions at Close Brothers Asset Management, said that much was at stake: “The pension reforms delivered unprecedented freedom for retirees to choose how to use their savings to fund later life. But with this freedom has come responsibility, and those on the cusp of retirement must make complex decisions that give them financial security for the full duration of their retirement.
“This comes at a time when life expectancy is climbing, annuity rates are bumping along the bottom, and the sustainability of increasing the State Pension with the triple lock is under threat.”
What is a Safe Rate to Withdraw Your Pension Cash?
Research by Bengen in 1994, among others, suggests an initial safe withdrawal rate from a portfolio is 4% of the assets, where the initial withdrawal amount would subsequently be increased annually by inflation and assumed to last for 30 years, which is the expected duration of retirement. But in depth research by Morningstar Investment Management reveals this is far from true for UK investors.
Instead financial advisers and retirees in the United Kingdom should use lower initial safe withdrawal rates than noted in prior research — the lower end of the range now starts towards 2.5% or 3%, says Dan Kemp.
“The generous capital market returns of the prior century that bolstered a comfortable and long-lasting retirement portfolio may give 21st-century retirees a false sense of security,” he warned.
Annuities Still an Important Retirement Tool
Despite record low interest rates and a cash bias among investors, £4.2 billion has been invested in 80,000 annuities since the pension freedoms were introduced in April 2015. The average fund was worth £52,500. Although this is small fry compared to the number of annuities being bought prior to the freedoms being introduced, it is heartening to see that many investors understand the important role an annuity product can play in retirement planning.
Despite rock-bottom rates making annuities less attractive – the income for life is calculated off the 10 year gilt yield which currently sits at just 0.96%, compared to 2.1% a year ago and 3.1% five years ago – they remain the only product on the market which can provide a retiree with an income for life.
“Lifetime annuities still should play a prominent role in your pension planning,” says Morningstar Investment Management chief investment officer Daniel Needham.
“Investors should consider a multi-asset portfolio that's geared towards drawdown, and that recognises the need to produce a regular income stream through an annuity. There should also be a proportion of your savings in an easy access account to cover all eventualities.”
