The UK retirement income market has seen a decline in activity over the past year.
Data by the Financial Conduct Authority (FCA) shows that in 2020-21, the total number of schemes accessed for the first time dropped by 12%.
Annuity sales have also dipped by 13%, with the majority of purchases being made by people over the age of 65%.
Similarly, defined benefit (DB) to defined contribution (DC) pension transfers decreased by 25%. This could potentially mirror the increasing regulatory scrutiny of the practice, including the FCA’s ban on contingent charging and the more recent limitations on transfers if scam activity is suspected.
Worryingly, the regulator’s data shows that pensioners are drawing down from their pots at an unsustainable pace, as 43% of withdrawals were taken at an annual rate of 8% or more of the pot value – a slight increase from the 42% in the previous year.
Paralysis
Andrew Tully, technical director at Canada Life, said: “[The] data shows a decline in activity over the last year as people have clearly been paralysed by the pandemic, with many opting to wait for a calmer year before making any long-term decisions around their retirement income.
“We can see evidence of this in the number of pension plans which have been accessed dropping by 12% and the number of annuities purchased falling by 13%. Many people who have opted to make regular withdrawals from their pensions do so at a rate of 8% or more, and it is the most popular withdrawal rate for all pot sizes up to £250,000 ($330,720, €292,445).
“While for some, this may be a deliberate strategy to deplete pots in a specific time-horizon if they have other assets to fall back on, for others, this may mean they run out of money in the years to come. Increased regulatory scrutiny on DB to DC transfers is clearly having the desired effect as activity is down by 25%. Advisers have been stepping away from this market for a number of reasons, but we know consumer demand is still there.
“While this is a significant financial decision and it’s important the right regulations are in place to protect consumers, we need to be careful that we don’t leave people unable to get advice as the decision to transfer will be the right one for some people.
“While annuity sales are still down, we can see an increasing number of people are choosing to purchase one later in life. Perhaps following a hybrid approach of starting with drawdown then gradually de-risking to an annuity. This makes sense as annuity rates improve as we age due to life expectancy and declining health.”
More awareness and guidance needed
Jon Greer, head of retirement policy at Quilter, shares the concern that withdrawing at an 8% or higher rate can become unsustainable for retirement income, and believes that retirees must be given more guidance on what to do with their funds and help them understand how not to run out of money in later life.
“While the number of pensions being fully cashed out at the first time of asking is decreasing, it still makes up the vast majority of ways pension pots are being accessed following the pension freedoms. It might be that people are taking a pause for breath with their retirement funds as a result of the pandemic, but it is important that providers, the FCA and government departments make every effort to ensure people know their options when it comes to retirement.
“However, while people cashing out immediately is dropping, it is still the overwhelmingly primary way for people to access their retirement savings. Our own experience tallies with this data in that customers looking to access their pension money usually already have a set idea about the action they want to take, especially with smaller pension pots.
“This is where the recent stronger nudge to pension guidance could make significant headway, but consumer awareness of pensions needs to improve to help make it a success and ensure decisions are properly researched and not taken on a whim.
“Perhaps most worryingly is the number of people taking regular withdrawals at an unsustainable rate. 43% of regular withdrawals were withdrawn at an annual rate of 8% or more of the pot value, up from 42% in 2019/20. This will quickly drain a pension pot and will not see it replenished fast enough, even in buoyant markets.”
Inflation risks
Greer added: “As we have seen over the last two years, markets can crash at an instant, and withdrawing at such a rate will result in difficult choices having to be made in retirement.
“Pension freedoms have been a great success for people being able to take flexible approaches with their money, but more access to advice and guidance is needed to help people understand longevity and the risk of running out of money in retirement. On its own the state pension is not enough to live off comfortably so people need to make sure their private savings can last.
“Awareness also needs to be raised on what people then do with the cash once they get it. Investment pathways will have helped with this, but it is too early to assess the impact these have had on people’s decision making. Far too many people take their pension pot and stick it in cash.
“With inflation spiking and prices likely to be reset at a higher level, those sat in cash will quickly see their money eaten away. This invisible threat could result in the difference between a comfortable and a difficult retirement.
“Guidance, therefore, is a good first step but every effort needs to be made to get people to seek financial advice on what to do with their hard-earned retirement savings.”
