There is a polarisation going on when people come to draw their retirement savings and these figures show it very well.
Those who want their money early (55-64) want the money in their bank account or at an enhanced drawdown rate and those who are waiting for their money 65-74 generally want their money as a pension.
The increase in numbers annuitising and taking drawdown (including UFPLS) amongst the older cohorts suggests that those who hang on – hang on for a wage for life. Those who are cashing out , diminish as a proportion the longer people delay taking their money.
Are we interested in pensions anymore?
It seems clear from the table above , that if we are interested in retirement saving as a means of social insurance then we should be messaging the value of delaying taking your money , with our state pension age as a guide to our default setting. If we are interested in having money back in the economy and an immediate revenue grab, we should be continuing with the current default – which is looking increasingly like your 55th birthday.
I have always been taught that pensions are an insurance against us living too long so I am of the former camp and I’m asking myself why none of the Government messages – either from the DWP or from Pensions Wise – emphasise the value of delaying taking savings – of being patient and of thinking of retirement savings as a means of protection against extreme old age.
And of the pots that are never accessed?
What the FCA’s figures do not show us, is the number of pots that never get spent by their owners but simply pass into the estate, untouched – at death.
The phenomenon of the untouched pot may please those – like John Major – who saw wealth cascading through the generations, a vision recently reinforced by Steve Webb in his role at Royal London.
However, I fear that many of the pots that remain untouched are never accessed out of fear (of drawing the money foolishly) or ignorance (of the pot’s existence).
I am not here arguing for a return to compulsory annuitisation (even for the 75+ cohort), but I am suggesting that the insurance companies and trusts that manage our DC savings have a job to do for those who never claim, just as they have a job to manage the gold rush at 55.
Thinking of pensions as social insurance gets me thinking of managing people’s retirement choices as akin to running an insurance claims department.
Quite properly there should be a balance between discouraging early encashment of retirement savings and the never-claim culture of the uber-prudent or the financially incapable.
Let’s look again at the highlights of the FCA’s latest survey of how we are accessing our retirement savings.
- Just over 645,000 pension plans were accessed to buy an annuity, move into drawdown or take a first cash withdrawal in 2018/19.
- 4 in 10 of all the pension pots accessed had a value of less than £10,000.
- Over 350,000 pension pots were fully withdrawn at the first time of access; 90% of which were less than £30,000 in value.
- 48% of plans were accessed without regulated advice or guidance being taken by the plan holder. 37% of plans were accessed by plan holders who took regulated advice and 15% by plan holders who did not take advice but received Pension Wise guidance.
- 40% of regular withdrawals were withdrawn at an annual rate of 8% or more of the pot value.
- Pension providers covered by the FCA’s data return received 57,000 defined benefit (DB) to defined contribution (DC) pension transfers.
My candid assessment is that this shows a market that is badly in need of that old fashioned service “claims management”.
Quite apart from financial advice, which is a highly sophisticated concept which simply doesn’t suit the needs of many people, there is need for simple assistance with a claim from the managers of our money.
This management should include help on tax , inflation and the impact of spending less now rather than tomorrow. This relates to concepts such as frugality which are deeply out of favour but which resonate with ordinary people.
The power of patience
Deferring taking our retirement savings – however we choose to do so, is desirable – except where life expectancy looks grim.
We know that people are overly pessimistic about life-expectancy and underestimate how long they live by seven years.
We also know that people dislike thinking about the consequences of growing sick in later years.
For all these reasons, deferred gratification of retirement savings makes sense (but is not happening much).
Set against this, the value of sorting immediate debt – often assumed to be repaid at 55 and the understandable joy at treating oneself and the family from a dip into the tax-free lump sum and you have a cogent argument for why 7/10 pots were accessed between 55 and 64.
It is true that we all have pensions coming to us from 66 or later but I worry that many of my generation have stopped thinking of private pensions plans as pensions at all.
We must change that mindset, if we are to talk of pension planning in any meaningful sense. We need to start messaging the power of patience – and without delay.