Pension fund access: numbers up, but most being sensible
The latest Retirement Income Market Data published by the Financial Conduct Authority (FCA) shows a marked increase in the number of people accessing their pensions since the pension reforms of April 2015.
The report, which covers the three months to September 2015, shows that almost 179,000 pensions were accessed in that period.
This makes a total of almost 384,000 pensions accessed in the six months to September - a figure typical of a full year prior to the latest pension reforms, according to Tom McPhail, head of retirement policy at Hargreaves Lansdown.
Of those 179,000 pensions, just over two thirds were fully cashed out, of which the vast majority (88 per cent) were small pots of less than £30,000.
'The appetite to take cash at retirement remains strong, and that will trigger tax concerns for unprepared individuals,' warns Rona Train, partner at Hymans Robertson.
Investors appear to be making use of the wider choice of access methods now open to them, with a third taking some or all of their pot through an uncrystallised fund pension lump sum and 30 per cent using income drawdown.
However, only 13 per cent of accessed pensions were used to buy an annuity. Moreover, two thirds of those who used their pot to purchase an annuity stayed with their existing pension provider rather than shopping around. Similarly, 58 per cent of drawdown customers did not change provider.
'Market competition appears not to be working, with fewer annuity purchasers shopping around,' says McPhail.
However, this may not be the case for drawdown in practice. Fiona Tait, pension specialist at Royal London, points out: 'Royal London figures show 93 per cent of our new drawdown business comes from external sources, which indicates that many advisers and consumers are, in fact, considering their options.'
Train points to the continuing power of inertia at retirement. 'The majority of retirees continue to use their existing provider, and this could increase as providers smooth out the transition from pre and post retirement.
'That isn't automatically a bad thing, as long as that provider satisfies the trustees and company sponsoring the pension scheme. Ongoing, good due diligence will be key.'
Low pension wise engagement
A further concern is that although 15 providers in the sample have pension policies which offer guaranteed annuity rates (GARs), the report found that 68 per cent of those accessing pensions with GARs did not take up the guarantees.
The FCA points out that this figure does include those who are too young to exercise the guarantee but old enough to draw their pension.
But Train says: 'GARs often give a higher level of annuity income than anything else you could get on the open market - so essentially people are missing out on a great opportunity to secure an income for life at rates that are hard to beat.'
She adds that a further 'particular concern' is the low level of engagement with the government guidance service, Pension Wise.
Although 17 per cent of respondents said they had used the guidance service, Hargreaves Lansdown calculates that only 8 per cent actually made an appointment with Pension Wise.
The low level of take-up 'adds pressure on trustees and companies to help members before and during retirement, ensuring they make the right choices', Train says.
Against these negatives, it's reassuring to see that income withdrawal is mainly at a sensible level and that full encashment is occurring mainly with very small pots. 'Many aspects of the freedoms are working very well,' comments McPhail.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.