More over-55s are tapping their pensions and over half are cashing them out entirely, new official figures reveal.
Nearly 740,000 pension funds were accessed in the 2022-23 financial year, up around 5 per cent from the year before, as people struggled to pay household bills in a period of rising inflation.
Some 56 per cent of pots are being cashed in full – the majority of them worth £10,000 or less, according to new data from the Financial Conduct Authority.
Meanwhile 36 per cent were invested in a drawdown plan and 8 per cent were used to buy an annuity in the year to October 2023.
Tapped: There has been a 5% rise in the number of pensions being cashed out, FCA data shows
Sales of annuities fell nearly 14 per cent to around 59,200, despite better deals coming on the market as interest rates started to rise.
However, recent industry figures covering the whole of 2023 suggest more savers are being tempted by a strong recovery in the guaranteed retirement income an annuity will provide.
Annuities were shunned for years due to poor rates and restrictive conditions, and after gaining a bad reputation on the back of mis-selling scandals.
The pension freedom reforms in 2015 prompted most savers to keep their funds invested and live off withdrawals instead, despite the financial market risk involved.
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Meanwhile, the FCA’s new report showed a sharp drop in the number of people transferring out of final salary pensions – which like annuities provide a guaranteed income for life – into invested drawdown plans where the holder bears the investment risk.
Final salary schemes have slashed the value of the offers made to workers to transfer out, because the rise in interest rates has improved their ability to fund pensions over the long term.
Former Pensions Minister Steve Webb says of the figures showing most defined contribution pots are cashed in full: ‘These figures highlight the fact that hundreds of thousands of people reach retirement each year with very small pension pots.
The temptation to draw cash rather than secure retirement income is great, especially in light of the cost-of-living crisis
Paul Leandro, partner at Barnett Waddingham
‘These pots would generate very little regular income if spread out over the decades of retirement,’ adds Webb, who is now a partner at LCP and This is Money’s pensions columnist.
‘Instead, the majority of people still judge that the best thing to do is to cash out their pension and enjoy some additional cash at the start of their retirement.
‘But with dwindling numbers of retirees having defined benefit pensions to fall back on, we urgently need to boost pension pots to a size where it makes sense to keep them rather than cash them in.
‘With every new set of figures we see the consequences of the government’s delay in expanding automatic enrolment, and the need for urgent action to get Britain saving more for retirement.’
Paul Leandro, partner at Barnett Waddingham, says: ‘The FCA should not be surprised by the increasing levels of cash withdrawals from pension pots, but they should be worried.
