A staggering 213,750 people in the UK withdrew funds from their defined contribution pension through income drawdown products in the year ending 30 June 2019, financial advisory firm Salisbury House Wealth found.
Income drawdown enables savers to draw a regular, taxable income from their retirement pot.
The sum has increased by 99% over the last five years hitting £18.5bn ($23.8bn, €21.6bn) for 2018/19 compared to £9.3bn in 2014/15.
Overall, nearly £76bn has been withdrawn through this mechanism over the period.
The data was obtained by Salisbury House Wealth through a freedom of information (FOI) request and relates to defined contribution (DC) pension schemes in the UK, International Adviser was told.
Risky decisions
Steve Webb, director of policy at Royal London, told IA: “Since the introduction of pension freedoms, income drawdown has gone from being a relatively niche product for wealthier individuals, to being a mainstream product, including for those with more modest pension pots.
“Allowing people to make unlimited withdrawals from their pension pot could run the risk of people running out of money prematurely, but so far there is little sign that this is happening.
“Once they have accessed any tax-free cash, most people are drawing relatively steadily from drawdown accounts, and the fact that withdrawals are taxable acts as a brake on those who might otherwise take their money out too quickly.
“Those with larger pots should clearly seek advice to help them manage this money over a retirement that could easily run to many decades.”
‘Making drawdown work’
But Tom Selby, senior analyst at AJ Bell, believes that people seem to be using their drawdown wisely, contrary to the belief that it could have led to poor investments.
“The flexibilities introduced in April 2015 have been extremely popular among savers and advisers, providing greater freedom to build retirement income plans that meet clients’ needs,” he told IA.
“This is not just limited to taking an income either – generous death tax rules introduced alongside the reforms mean unused funds can be passed down generations without falling into the hands of the taxman.
“Clearly, when you hand people total flexibility over how they withdraw their defined contribution pensions, there will be some who make poor investment or withdrawal decisions; but, in the main, the evidence points to people using their funds sensibly to provide an income throughout retirement.”
Tim Holmes, managing director of Salisbury House Wealth, said: “The increase in pension withdrawals is not a problem, as long as it’s based on proper decision making and sensible budgeting.
“Pension pots need to fund expenditure for longer and longer retirements, as life expectancies increase. Therefore, it is very important to have a plan for how long you need pension savings to last before you start spending for the short term.
“There are also rules that many people are not aware when they withdraw funds. For example, under the government’s deprivation rules, if an individual is deemed to have intentionally reduced their private pension pot, then they may receive less in state benefits.”
Reviews needed
The system is far from perfect, warns Selby.
“There remain issues that need to be sorted out, however. The money purchase annual allowance is a pernicious penalty for taking taxable income from your fund which runs counter to the increasingly flexible working patterns of many people over 55, and should therefore be scrapped.
“The taxation of withdrawals, which requires providers to issue a ‘Month 1’ emergency tax code when someone accesses their fund for the first time, is also not fit for purpose and in need of urgent review.
“More broadly, with the pension freedoms now bedded in, focus needs to turn to improving education and engagement among the public, and hopefully boosting take-up of advice as well.
“This is key to making drawdown work and ensuring people don’t risk running out of money in retirement.”
