The FCA’s latest data on the way we’re drawing down money from our pension pots shows a sharp increase in the amount of money being taken via flexible and UFPLS whiles total encashments and annuity sales are steady,

But when the data is looked at by numbers of pots accessed, we can see that over the six months to April 2021, the number of pots being accesssed for flexi acccess (plum) and UFPLS (purple) increased but less dramatically. This means that flexi and UPLS drawdowns were increasing in size either because people were encashing more of their pots, or because the pots were bigger in the first place.

It’s encouraging to see that the red line (people taking all their money at once) is falling both in terms of pots accessed and in the amount coming out of these pots.

The FCA data shows some remarkable insights and I expect to come back to these in future blogs.

The latest numbers confirmsomethig we have seen in previous updates – people with large pots are drawing down while people with small pots are encashing, the small number of people buyng annuities are doing so with big pots; as with UFPLS, annuities appear to be a market for the sophisticated (or at least the relatively wealthy)

But there is little “delayed gratification”, the vast majority of pots are being accessed before state retirement age (it would be helpful to see the band 55-64 split so we could see the numbers accessing their pots before 60)

The attraction of annuities seems to increase with age while nearly three quarters of us are accessing our pots earlier than our state pension.

One of the most interesting tables shows the use of advice and guidance when people buy annuities, cash out or take the two forms of drawdown.

Pension Wise is used heavily by those purchasing annuities – who are decreasingly using advisers. This confirms anecdotal evidence that advisers are not reccomending annuities so much as drawdown, The flex-access drawdown market is dominated by advisers with relatibely little influence from Pension Wise.

The vast majority of encashments are unadvised and worryingly few of  those encashing have been to see Pension Wise. Again there appear to be similarities between those drawing annuities and those taking UFPLS with a large number of unadvised going the UFPLS route. This suggests that there is a segment of the market who are independent researchers , taking decisions for themselves in a sophisticated way,

Flexi-access drawdown is the key advised product

The FCA hone in on flexi-access drawdown, for special treatment. It is the area where most advice is given and where most money is taken.

This chart shows that the smaller your pot, the more of the pot you take in year one. This suggests that people are using their pots on a targeted income basis (eg I want my pot to pay my an income of x and I’ll worry about the money running out later).

What is astonishing is that throughout the bands of pot size, 8% drawdowns are common with  athird of those with pots between £100-£250k drawing at this very high rate, It is only where the pot is above £250,000 that we see more than half of people drawing at 4% or less. This suggests that most people are working their pots at rates that most economists would say are unsustainable.

And age doesn’t make a difference to this high drawdown culture. Nearly half of people setting out between 55 and 64 are drawing at 8%+ , they are joined by those who start drawing late in life. The gentlest drawers are those commencing drawdown around their state pension age – this group appear to conform to the kind of behaviour that best replicates a “pension”.

What the FCA numbers don’t tell us is how many personal pensions are not being drawn at all and are simply rolling up for the future. Many of these pension pots are simply surplus to requirement but the worry is that there are a large number of pensioners who aren’t taking their income for the wrong reasons. Eitehr they may have lost touch with their pots, or they are afraid to touch their money for fear they will not have it when they need it later or because they are concerned about the implications of drawing down for pension or universal credit,

Method in our madness

There is a degree of consistency in our behaviour though much of the behaviour appears maddeningly wilful. We should note that personal pensions represent only a small slither of men and women’s retirement income

The pink slice is what the FCA are looking at and while most of the orange slice is defined benefit, the majority of new retirement saving is going on through workplace master trusts which are occupational not personal pension schemes,

These numbers are the last set that won’t be influenced by the introduction of investment pathways. My guess is that the investment pathways will have little initial influence over savings behaviour, because the majority of unadvised retirement savers are either very sophisticated or not sophisticated at all. If Pension Wise really increases its penetration into the unsophisticated part of the non-advised market, then we may see less encashments and more drawdowns and annuities, but we won’t see the result of the stronger nudges till this time next year.

What is on display here, looks relatively well ordered, there appears some method in the madness, but this is the part of the market which the FCA are regulating. The rest of the market is “terra incognita”, it represents what is going on with pots arising from occupational DC schemes and with pots which are virgin territory. It’s these parts of the market that give most cause for concern. For the unknown unknowns – there is no plan, only hope. That is not a good way to run a pension system.