I have four points to make about the figures published by HMRC on taxable drawdown yesterday
- The amount being drawn down is a dribble
- The drawdown is consistent over time – people are drawing down on average £30k pa
- These are the taxable figures- we can assume that 25% is being skimmed for tax free cash (which could be added into the totals to suggest total cash out)
- Boomers aresuffering a bout of financial constipation
But first – here are the numbers!
The amounts being drawn down are a dribble
Here’s John Lawson’s perspective (which I share)
£19.8bn withdrawn since pension freedoms. Sounds like a big number, but…1) new contributions to PP/GPP alone over 3 tax years to 17/18 = £75bn and 2) investment growth in all DC – occupational and personal – since pensions freedom day probably > £100bn. Perspective!
— John Lawson (@pensionslawson) July 31, 2018
Not only is the amount coming out , puny, compared with the amount going in , but it’s puny compared with the pensions being paid from occupational pensions (four times as much). Perhaps more worryingly – the amount being drawn down is – in total- less than a quarter what was transferred out of DB schemes via CETVs. By any measure, drawdown is a half-opened tap .
The drawdown is consistent over time at £30k pa+
If you compare the growth in drawdown over time , you see a fairly consistent picture in terms of growth.
What appears to be going on is that people are drawing down more in the early part of the year and easing off in Q3 and Q4, even so – the typical annual drawdown is over £30k.
Since we know that on average , people have just over £30k in their pension pots, this either suggests that drawdown is happening from the “rich person’s pots” or people are fully cashing in.
My suspicion is that it is mostly the former , but if we follow the 4% rule (where you only drawdown 1/25th of your pot value, this suggests that average drawdown pots are £750k + . If you add back in the tax -free cash, not shown in these numbers, then you’d expect drawdown to be a sport for pension millionaires.
The numbers are of course diluted by those with small pots taking all their money at once (which may be tax-efficient) and the odd Pension Muppet, taking all his/her money at once – making HMRC’s day. I know that someone will comment that there are the odd time when it is worth pension busting and paying 45% on most of it – but we are talking here of “mainstream”.
The alternative reading is that some people aren’t drawing down at the 4% rate , but burning cash at much higher rate – with heroic assumptions on mortality/inflation and investment growth.
Whatever way, these numbers do not suggest that people in drawdown are typical of the nation as a whole! I would characterise drawdown currently as a financial freak show.
These drawdown numbers may be undercooked but…
What we are being shown is what HMRC get via Real Time Information as the taxable element of money withdrawn. Up to 25% of all “crystallised” pots can be taken tax-free and probably has been, suggesting that the £17.5bn drawdown since April 2015 probably needs to be inflated to something closer to £25bn.
Even so, this is a tiny amount of money relative to the amount paid from annuities, occupational pension schemes and of course the state pension!
The pension freedoms are in no way the universal payment system for the UK’s elderly population. Drawdown is a sideshow- a financial freak show. If the FCA considers that the exercise of pension freedoms is the critical success factor for retirement outcomes, they are ignoring the data.
So what is happening to all the money?
The official line (in the absence of comment from our Pensions Minister) comes from a former Pensions Minister – Steve Webb
These figures show the continuing popularity of pension freedoms. In the latest three months over a quarter of a million people took the opportunity to make flexible withdrawals from their pension, and withdrawals were at a record level. The key challenge is to make sure that more people take advice and guidance when deciding how to access their pension savings so that they do so in a sustainable way that meets their objectives’.
Well 94% of us are not taking advice Steve. The 6% of us that are – may be drawing down advisedly – but pension freedoms, like financial advice, seems to be a minority sport!
So where is the money going – I suggest our pension savings are currently going nowhere. As John Lawson’s tweet suggests and the ONS MQ5 tables confirm, money is going in but it’s not coming out. We are hoarding our pensions – or perhaps suffering from FINANCIAL CONSTIPATION.
Perhaps this is because, finding a way to spend our retirement pots is – as William Sharpe puts it – “the nastiest, hardest problem in finance” . That comment comes from the man who figured out how to price portfolios via the capital-asset-pricing model, and how to measure risk via the “reward to variability ratio,” or what has come to be known as the Sharpe ratio.
If William Sharpe can’t solve the drawdown dilemma, is it any surprise that neither can the 94% of us who don’t have brilliant advisers – who can!
The obvious conclusion to all this, is that we need a new way to spend our savings – and we all know where I am going on that.