Research conducted by FWD on behalf of AJ Bell has shed light on what has happened to the £17.5bn that has been flexibly withdrawn since pension freedoms began in April 2015.
The research, released on 26 June, surveyed 370 people who have accessed their pension flexibility since April 2015.
Bizarre and surprising
One of the research’s key findings was that despite pensions being designed to fund life in later years, only a quarter (£4.7bn) of withdrawals had been used to fund day-to-day living.
AJ Bell said one the most “surprising” results was that £3bn is “languishing in low yield bank accounts”.
Further, £1.6bn has “rather bizarrely” been withdrawn from pensions to invest in other products such as ISAs.
A whopping £2.3bn has been spent on luxury items such as holidays, cars and home improvements.
‘Sensible’ spending
On the more positive side, £2.9bn had been used to pay off debts and reduce interest payments.
Despite stories of boozing and gambling, only £245m had been spent on entertainment such as eating out, season tickets or gambling, AJ Bell said.
Politics over practicality
Tom Selby, a senior analyst at AJ Bell, said regulators and policymakers have been playing catch-up since chancellor George Osborne first introduced pension freedoms.
“The pension freedoms, while hugely popular, were undoubtedly announced with politics rather than practicalities in mind. Because the reforms were almost entirely untested, it has taken the Financial Conduct Authority (FCA) a while to build a picture of consumer behaviour and recommend any possible market remedies.”
He said while the FCA’s interim report concluded most people are not squandering their hard-earned pensions, there is evidence some people are making poor retirement decisions.
“For example, 17% or £3bn of withdrawn pension money has been shoved straight into a bank account.
“This might not be a problem in the short-term – indeed it makes sense to have some ready-cash available in most cases – but it almost certainly isn’t an advisable long-term investment strategy, particularly with interest rates at record lows and inflation returning to the UK economy,” he said.
One solution being proposed, Selby says, is for people to be given help through a ‘mid-life MOT’ in order to assess their retirement income strategy, “although this will require buy-in from both politicians and the regulators”.
| £4.7 billion | Has been spent on day-to-day living |
| £3 billion | Is in low yielding bank accounts with investors facing the ‘double jeopardy’ of tax on withdrawals and low returns |
| £2.9 billion | Has been used to pay off debt and reduce interest payments |
| £2.3 billion | Has gone on luxury items such as holidays, cars and home improvements |
| £1.6 billion | Has been withdrawn from pensions to invest in other products such as ISAs |
| £1.2 billion | Has been used to help people’s children |
| £1 billion | The buy-to-let market has had a £1bn injection over the past three years with many people using pension withdrawals to invest in property (buy-to-let) |
| £245 million | Has been spent on entertainment such as eating out, season tickets or gambling |
| £60 million | Has been used to pay for care |
| £500 million | Other |
| £17.5 billion | Total |
