My analysis of this data leads me to three behavioural insights

1. People are concerned about “net cash” – not “gross before tax”
2. People want control and ownership
3. People prioritise today’s cashflow needs over a wage for life

The data published yesterday is over a year stale. As a snapshot of what is happening today it has limited value but as a means of assessing trends since the introduction of pension freedoms in 2015 it is useful. It tells us about the decisions are taking with their money and importantly it tells us that a lot of decisions are being deferred. By far the biggest bar on the bar chart would be the untouched pots, the pots that are running on awaiting a reason to be “crystallised” , encashed or be subject to tax-free cash stripping (uflpls).

1. Lesson one; People are concerned about “net cash” – not “gross before tax”

Tax is clearly a big driver and there is an important lesson to be learned here. People are reluctant to pay tax on their pension which they have been brought up to believe is tax free. We are seeing this in the outrage that the state pension may exceed the lower income tax threshold and therefore be taxable in the hands of non-tax-payer. People like the idea of the tax-free-cash sum but they don’t like the idea of tax on drawdown income and they especially don’t like the idea of being taxed on an emergency code. Note to behaviouralists , people like to know what they’re getting – cash in hand. There is nothing transparent in quoting a pension payment gross only for it turning up net of an unexplained tax-charge.

So what we continue to see is a tale of people taking pots as pensions, not by drawing income but by simply encashing the pot (the lighter blue line). There has been a slight increase in the numbers of people drawing down an income and a small increase in people encashing but less people are buying annuities and the sophisticated UFPLS market (taking tax free cash as you go) is still to take off.

Lesson two; People want ownership and control

Though the total number of pots accessed in 2022-3 is slightly down on the year before, the picture is the same. Small pots (les than £10k) amount to half the market and nearly 200,000 encashments. The power of tax is clear again, large pots don’t get encashed as only a muppet would pay 45% on much of the income.

Small pots get cashed out either because people don’t care, don’t pay or don’t understand about tax – and because the need for ownership -or at least an absence of debt is the over riding factor in the decision making. Much of this cashing out may be a bridge to pension (the state pension typically).

One thing I haven’t seen before is the spread of annuity purchase which was thought to be a big pots game. We are now seeing annuities purchased across the band of pot sizes, although relative numbers remain very small. My second takeaway, people want ownership and control is based on the data. Drawdown needs money, people get that, where there isn’t sufficient money, there is no market for drawdown. Is this message being drawn from the pitiful income from small pots or from providers telling people with small pots to take them?

Lesson three ; People are prioritising today’s cashflow needs over an age for life

People are not planning on lifetime incomes. Only where the pot exceeds £250,000, where advisers get involved, are pots being drawn down at sustainable levels. While there is some moderation with smaller pots the vast majority of drawdown rates are being set to produce a desired level of income, not a sustainable rate. In other words, people are either purposefully or out of ignorance planning to run their pots down faster than they run themselves down. Carpe Diem or necessity calls, people are not using drawdown to provide a pension.

This does not accord with the stated aims of a high proportion of people surveyed for what they want out of retirement

60% of people surveyed by AON about their pensions said they wanted an income that lasted as long as they did

“Our 2018 DC and Financial Wellbeing Member survey highlights that 60% of DC savers want an income for life in retirement, but their only way of achieving this is via an annuity, which according to FCA Retirement Income data (Sept 2020) only 10% purchase. This illustrates that the need is not being met”

While you shouldn’t believe everything you read in surveys, ongoing work by Ignition House and others backs up the popular view that a workplace pension should provide a pension.

There is a mismatch between experience and expectation here , which is worrying. For how much longer will people put up with workplace pensions without the pension?

Appendix

There is a lot of granularity in the second part of the survey which I am including here for completeness. I will come back to the more detailed lessons we can learn from the data , by way of how people are taking (or not taking) decisions.