Continuing my reading of the important bits of the FCA’s Financial Lives Survey.  I’ve jumped a detailed inspection of how people react to DC pension statements, I may return to this as it will be more important when dashboards take over that function in time.

But this blog deals with how people are getting at their money (surely we can ditch the word decumulation – it is not what people think of doing!).  These are good questions posed by the FCA

It explains just how complicated it is for people as they start wanting their money back. What follows is vitally important, 450,000 people are drawing money out of their pension pots each year and around 75,000 pa are taking money as soon as they can (aged 55). This tends not to be a complex job, it is a smash and grab job on an accessible pot,

Tax problems for people with smaller pots tend to be smaller because they are usually lower or no tax payers and because the tax payable on a small pot is likely to be much smaller. I suspect that even beyond tax-free cash, many of these cash-outs may not have been over painful but that’s for the HMRC to cast light on. This is one of the stand-out slides of the long deck.

There is no sophisticated plan, the cash-outs are not for investment , For more than a quarter, cash out is for  immediate liquidity transferred to people’s bank accounts. Most cash-outs have been spent. My personal pension cash-out was spent to bring down the mortgage, my partner had some influence.

This shows how sophisticated a part of those reaching retirement are. The UFPLS route, where tax free cash is taken as part of an income strategy of course maximises tax-free investment and is more efficient for those in drawdown (who may be getting advice). Deferring tax free cash by annuitants is similar to the principal between an investment ISA, tax is avoided till the money starts earning outside the pension and this may not happen till death. The questions around IHT are not being asked here.

Partial encashment is relatively sophisticate but it is hardly a “pension” when what follows is the purchase of an annuity (not an invested pension) or a drawdown. This part of the population are in need of a new option which provides them with income powered by long-term productive finance (amongst other things).

It is easy in this session to point a finger at the destruction of pension freedoms but we should remember that most people before 2015 purchased annuities reluctantly and often badly. Annuity purchase these days appears more sophisticated and “better”. But a large amount of the money that is not cashed out, is not paying income – simply waiting for a good idea.

address to the idea