Over Half of Brits Cash Out Pensions Entirely Amid Cost-of-Living Crisis

More than half of individuals over 55 are withdrawing their entire pension funds. The latest figures from the Financial Conduct Authority (FCA) expose a concerning trend in pension management amidst the ongoing cost-of-living crisis.

In the financial year 2022-23, approximately 740,000 pension funds were accessed, marking a 5% increase from the previous year. This rise is attributed to retirees’ need to manage escalating household expenses during a period of high inflation. A significant 56% of these pension pots, particularly those valued at £10,000 or less, were completely cashed out.

While 36% of pensioners opted for a drawdown plan, only 8% chose to buy an annuity, despite the attractive rates offered due to rising interest rates. Sales of annuities witnessed a nearly 14% decline, totaling about 59,200 for the year.

Shift in Pension Preferences

Annuities, often avoided due to their previously poor returns and rigid terms, are seeing a renewed interest. This shift comes after years of unpopularity and a tarnished reputation from past mis-selling scandals. The 2015 pension freedom reforms have largely influenced current trends, with many savers preferring to maintain their funds invested and withdraw living expenses, despite the risks associated with financial markets.

Decrease in Final Salary Pension Transfers

The FCA’s report also highlights a stark decrease in the transfers from final salary pensions—which offer a lifetime guaranteed income—into riskier invested drawdown plans. This reduction is linked to decreased transfer value offers from employers, thanks to better funding capabilities resulting from increased interest rates.

Steve Webb, former Pensions Minister and now a partner at LCP, commented on the tendency of withdrawing small pension pots in full. “The temptation to draw cash rather than secure a retirement income is great, especially in light of the cost-of-living crisis,” he noted, stressing the urgent need to enhance pension savings to prevent premature cash-outs.

Paul Leandro, a partner at Barnett Waddingham, criticised the FCA’s apparent lack of concern over the increasing withdrawals. He emphasised the necessity for a robust retirement planning framework to help individuals better manage their retirement finances, considering the dire state of current pension contributions and withdrawals.

The Need for Enhanced Pension Education

Richard Sweetman from Broadstone highlighted that while smaller pots are most affected by high withdrawal rates, the broader issue of retirement adequacy looms large. “It is vital that pensioners are accessing their pots sustainably, ensuring the funds last throughout their retirement,” Sweetman stressed. This calls for increased awareness and education targeted at those nearing retirement, helping them make informed decisions that consider longevity, personal circumstances, and retirement goals.

The recent rise in annuity sales suggests a possible shift in strategy, with more individuals potentially opting to secure annuities later in their retirement years to benefit from higher rates.

Defined Contribution vs. Defined Benefit

For those unclear about the different pension schemes, here’s a brief explanation:

  • Defined Contribution Pensions: These plans involve contributions from both the employer and the employee, which are invested to build a retirement fund. The amount available at retirement depends on the investment’s performance, placing the risk on the saver.
  • Defined Benefit Pensions: Commonly known as final salary pensions, these offer a guaranteed income throughout retirement based on earnings and years of service, with the employer bearing the investment risk. These are increasingly rare outside the public sector.