Government has published latest figures on the way people are taking their pension savings. The chart above shows a steady rise in taxable payments with payments spiking at the start of each tax year as people grab their cash for the year
They suggest that few people are paying themselves a salary in retirement from their pension savings
Instead, they are paying themselves sums of money according to immediate need.
In a note to statistics published yesterday , a Government official comments
The number of individuals for the year and since inception totals are less than the sum of the number of individuals from each quarter or year, as some have taken payments in multiple quarters and/or years
This suggests that the majority of people accessing their pension pots are doing so as a one-off exercise , a process known as “cash-out”. Cashing a pension out is good for short-term Government revenues but can be bad news for savers who find their savings disinvested, in cash and taxable , rather than providing longer term financial security and a replacement salary for the one they lose as they retire.
The statistics show a steady increase in encasements over the period since 2015 when George Osborne allowed us to draw down from our pension pots as it pleased us.
Earlier this week, I reviewed an extremely good book by Richard Dyson and Richard Evans which is a self-help manual for people looking to convert pension savings into what they call “your retirement salary”.
It looks at three rates of withdrawal, one that simply takes the “natural yield” from a portfolio of shares and bonds and doesn’t eat into the capital, another draws down capital but at no more than 1% per year and the third is ultra conservative and allows income to roll up so that the pension pot becomes a source of inheritable wealth.
Clearly these strategies are being ignored by the vast majority of people taking their pension freedoms.
When Aon asked ordinary savers what they wanted from their pension savings 62% chose an income that replaced what they were earning before retirement. In recent correspondence with NEST’s Head of Retirement Options , Ray Chinn told me
A Nest member survey from 2017 of over 5000 members found that 34% of members expected Nest to pay them a regular income when they retire. 6% expected to use their pot in a different way and 60% didn’t know (hadn’t thought about it, didn’t understand the options or haven’t decided).We also have anecdotal evidence from other research / focus groups that some members expect their regular income to start automatically alongside their State Pension. This seems to originate from the view that Nest is a government backed scheme so is somehow linked to the State Pension.
The message is consistent. Many people don’t know what to do when they get to retirement .
In the absence of any proper information as to what to do, they are either doing nothing or blundering around cashing money on a seemingly random basis. If people are being driven by anything , it is tax rules, there are significant spikes in encasements at the start of each tax year.
How much longer this sorry state of affairs is going to continue is anybody’s guess. Yesterday also saw news that the Queens Speech is likely to be postponed and that the much talked of pensions bill – containing two initiatives that could help (CDC and pensions dashboard) might never be published.
A delay to the Queen’s Speech affects key reforms in the Pensions Bill including new powers for the Regulator, collective DC and the Pensions Dashboard. https://t.co/wYO9gFNuUm
— Josephine Cumbo (@JosephineCumbo) April 30, 2019
All this spells bad news for those who are approaching retirement. The Money and Pensions Service say they are now in listening mode. Please listen to this.
Pension freedoms are a mess, Pensions Wise isn’t working and we badly need Government to step up and make life a little easier for the man and woman in the street.
Evans and Dyson’s self-help manual is great for the financially sophisticated investor but it does not solve problems for those who aren’t.
We need a national initiative to get people thinking about what their retirement savings will bring them in retirement and how they can use them to replace the salary that they are giving up.
Required reading for the pension saver