Most people’s pension pots remain mysterious and inaccessible

There’s not been much discussion about the HMRC’s latest update on what’s being drawn down from  our pensions and what there has been has interpreted the data differently.

Alistair Mcqueen has tweeted positively

New pension freedom data out today. Total taxable payments have breached £40bn, to £42bn. Positively, no evidence of a “dash for cash”, despite the economic downturn. Average payments in Q4 2020 were an all-time low. Well done, savers! https://t.co/GJgXifqAWv

— Alistair McQueen (@HelloMcQueen) January 29, 2021

While Jo Cumbo takes a less rosy view.

So what does good look like?

I suspect that flexible withdrawals from pensions are made for two reasons, the first is need and the second is greed.

Alistair – thrifty Scot that he is – likes to see his saver’s keeping their money in their sporrans. But this is unlikely to please the Treasury who would like to see money being returned to the real economy and to see some tax revenues on the flexible payments.

Jo -pragmatic Australian that she is , worries that the increase in the numbers of savers requesting money back from their pensions is a sign of household finances getting squeezed.

So what did the HMRC actually say?

This is the commentary delivered by HMRC

Throughout October, November and December 2020, £2.4 billion was withdrawn from pensions flexibly. This represents a 6% increase year-on-year from £2.2 billion withdrawn throughout the same months in 2019. The total value of flexible withdrawals from pensions since flexibility changes in 2015 has exceeded £42 billion.

360,000 individuals withdrew from pensions throughout October, November and December 2020, a 10% increase from 327,000 during the same months of the previous year. There was a 4% increase in the number of individuals withdrawing compared to the previous three months.

The number of individuals making withdrawals typically drops in July, August and September after peaking in April, May and June. October, November and December typically see a slight drop in the numbers of individuals withdrawing. This change in behaviour may be attributable to the impact of the COVID-19 pandemic.

The average amount withdrawn per individual throughout October, November and December 2020 was £6,600, falling by 3% from £6,800 during the same months in 2019. Since reporting became mandatory in April 2016, average withdrawals have been falling steadily and consistently, with peaks in April, May and June of each year becoming a noticeable trend, however we did not see a peak in these months of 2020. This may also be linked to the impact of COVID-19.

Here are the numbers – from source

And here are those numbers in a chart

All we can really say is that there have been more savers drawing down on their pension but they have been drawing less.

This would suggest to me that people are generally being prudent (Alistair’s point) but that demand for the money is wider (Jo’s point). Whether the “impact of Covid” is to reduce spending among the well off (demonstrated by smaller withdrawals) or due to increasing hardship (demonstrated by higher numbers of withdrawls) is a moot point.

What is clear is that the general trend both in the numbers of individuals and the amounts withdrawn is upwards and this should be considered good news.

The utility of a pension is its capacity to meet the regular financial needs of people holding pensions. The immediate encashment of a pension is not a good pathway , nor the accumulation of wealth to be passed on to the next generation. Pensions are supposed to be a string of payments that cover the period between work ending and death taking its toll. When I say “supposed”, I mean that that is why HMRC offers incentives to those who save (members) and those who help people to save (sponsoring employers).

The FCA’s studies into income in retirement show that the numbers drawing down a pension from their pot is quite low.

What the FCA numbers don’t tell us is the number of pots simply rolling up, because their owners are too confused or frightened to know what to do with them.

Of the pots accessed, only one in three use their pots for drawdown and over half of all pots accessed are fully encashed day one.

While there remains a hardcore of enthusiasts for guaranteed income (around one in ten pots are being converted into annuities), there is little evidence otherwise that people  turning their pots into pensions are establishing a ” new default”.

My conclusion

The HMRC data – like the FCA data, paints a confusing picture – even about the impact of the pandemic. There is no consensus amongst people about how they should turn their pot into a pension, indeed the nearest thing we have to definite trends is that only a small number of those with pots are buying pension annuities  and that number is diminishing. The information in the HMRC data is inconclusive and gives rise to quite different interpretations.

There is nothing in the data coming out of the various arms of the Treasury that suggests people are comfortable with their retirement choices.

With the introduction of the much delayed investment pathways , only a weekend away, it will be interesting to monitor these numbers through 2021. Frankly , I am not optimistic that the pathways will make a radical difference in the choices made. The fundamental need, for a default wage in retirement solution for the mass unadvised market, remains unsatisfied and the only solution on the horizon, to meet this need – is CDC.