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Pension withdrawals grow as many access funds ‘to stay afloat’

Pension withdrawals grow as many access funds ‘to stay afloat’
Matt Browning
Written By:
Matt Browning

The number of people withdrawing cash from their pension plan for the first time increased by almost 5%, retirement income data reveals.

Almost three-quarters of a million (739,535) people accessed their pot from April 2022 to March 2023, compared to 705,666 the year before.

More people also took out lump sums, known as ‘uncrystallised fund pension lump sums’ (UFPLSs) than in 2021/22 too, rising from 36,271 to 41,571, according to the Financial Conduct Authority’s (FCA’s) retirement income market data for 2022/23.

Just over half (56%) of people with a pension pot cashed out their pension in full, with the most likely group to do so aged between 55 and 64 years old, with 70% of those who did so in that demographic. But the amount of the funds taken out was mostly worth below £30,000.

Of the 205,000 pots cashed out in full, around two-thirds (137,000) were worth under £10,000, and 184,000 were worth under £30,000.

Meanwhile, the overall amount of cash withdrawn in the UK by workers and retirees decreased by 5%, dropping to £43,199m.

Retirement funds are not enough for many pensioners

With the proportion of people taking out lump sums increasing as the number overall decreased, it suggests the funds stored in retirement pots are “very small”, according to pension consultancy Lane Clark & Peacock’s (LCP’s) partner Steve Webb.

Webb said: “These figures highlight the fact that hundreds of thousands of people reach retirement each year with very small pension pots.

“These pots would generate very little regular income if spread out over the decades of retirement. 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.”

Webb added: “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.”

Defined benefit transfers continue to fall

The number of defined benefit transfers dropped by a third (32%) to 18,073 in the previous year and even further fell in 2020/21.

Not only did transfers drop, but the firms that received defined benefit transfers did too, dipping from 120 to 116 between 2021/22 and 2022/23.

Brian Nimmo, head of redress solutions at actuarial consultancy and defined benefit redress specialist OAC, said: “DB transfers have consistently continued to decline, and the latest FCA data shows that trend continuing.

“Falling transfer values are likely to have accelerated that trend, as pension savers increasingly see the risk of losing the value of the guarantees in a DB pension by transferring into a defined contribution arrangement.

“A significant number of advisers have stopped advising on DB transfers too as they decide that increasing regulation makes it too risky for their business, and the FCA’s ‘polluter pays’ reforms may accelerate that trend.”

As the take up of defined benefit pension transfers slides, Nimmo maintains it still has value. He said: “While a transfer may be the right decision for a limited pool of pensioners, we would expect volumes to continue falling over the coming years.”

Regulated advice sought by less than a third

While advisers are opting against defined benefit transfers, the number of people who took advice before accessing their pension pot for the first time also dropped.

Less than a third (32.9%) of plans accessed for the first time in 2022/23 progressed after receiving regulated advice, compared to 33.4% the year before.

But, Kirsty Anderson, a retirement specialist at Quilter, believes it is more important than ever to consider professional advice before making a huge commitment on their pension.

‘Guidance offers valuable resource’

Anderson said: “These figures suggest that the rising costs of energy and food compelled people to dip into their retirement funds with more people accessing their pensions to help stay afloat, albeit perhaps reluctantly due to the reduced amounts being withdrawn.

“As the cost-of-living crisis persists, individuals must carefully navigate their retirement options, seeking professional advice and considering the long-term implications of their choices.

“Despite the introduction of the ‘stronger nudge to pensions guidance’ in June 2022, this morning’s figures from the FCA also suggest that the number of people booking Pension Wise guidance appointments has also fallen.”

Anderson added: “Guidance offers a valuable resource for those looking to go it alone when they access without the advice and explain the different options available, but the stronger nudge has not provided the expected boost to the take-up of guidance sessions since its implementation.”