Middle Britain’s 100% savings grab triggers call for risk warnings

25 February 2020

Industry experts call for government action to prevent the rate at which people are taking money out of their pension pots


Over-55s are withdrawing their entire pension pots at the highest level since freedoms giving them full access to their nest eggs were introduced five years ago, prompting calls for the Government to act.

The average rates at which people are pulling money from their pensions could see them running out of cash in retirement without other sources of income, according to a report by the Association of British Insurers (ABI), a trade body.

It wants the Department for Work and Pensions (DWP) to step in with mandatory risk warnings sent to pensioners who want to give up valuable defined benefit schemes to transfer into more flexible defined contribution pensions, and spend their money as they wish.

High levels of full pension cash-ins – which despite the concern tend to be smaller pots, suggesting they are not pensioners’ only income – are not the only issue flagged by the ABI.

It points out 40% of all pension withdrawals were at an annual rate of 8% and over, twice the rate recommended by financial experts to avoid running out of money in retirement. 

On average, withdrawing 3.5% from a pension pot annually gives a 95% chance of not exhausting savings in retirement, according to ABI analysis. Taking 7% a year gives only a 60% chance of not outliving your cash. 

“This could be a problem in the future, as more people will be relying on defined contribution pension savings”, the ABI report states. These place virtually all responsibility on savers to ensure they make the right retirement choices, rather than the guaranteed income provided by defined benefit schemes.

Government rules should force defined benefit schemes to send risk warning letters to pensioners who want to leave, it adds.

Savers could also get a ‘later life review’ on how not to spend their nest eggs too quickly, a proposal the ABI wants the Money and Pensions Service – set up by government to provide financial guidance –  to develop. Pension companies would also give customers more of a steer.

Data from City watchdog the Financial Conduct Authority found in 2018/19, nearly half (48%) of over-55s accessed their pension pots without getting regulated advice or guidance.

Pension savers need all these changes now to head off dangers that won’t be apparent for years, the ABI warns.

“While the reforms have proved very popular, and have increased people’s options at retirement, it will be decades before their full impact can be assessed,” the report says.

“The real test of the reforms will be in the years to come, when we will see if those who have exercised their options have sufficient income in later retirement.”

Yvonne Braun, ABI’s director of policy for long-term savings and protection, says: “Nearly five years on from their introduction, it is now time to review how the pension freedoms are working.

“This report highlights some warning signs. We urge Government and regulators, working with the industry, to act on our recommendations, to deliver the changes needed to improve the outcomes for present and future retirees”.

Commenting on the ABI report, Stephen Lowe, group communications director at Just, a retirement company, says  evidence such as high drawdown withdrawal rates from modest pensions does not inspire much confidence. 

“Wealthier individuals are the most likely to be among the winners of the policy because they can afford to take professional advice and more investment risk while sheltering pension assets from inheritance tax. 

“It is ‘Middle Britain’, those with small to medium-sized pension assets who depend on modest pension income to sustain their living standards, who are most at risk,” he adds.

“Clearly a policy that only works for one particular slice of the population but leaves the majority vulnerable is going to struggle to be a long-term success.”


Pension pots

Withdrawing money from pension pots night be caused by government rules on elderly care fees. Care fees will take pensioners assets anyway, so best to run down assets before they get stolen.


I was under the impression that if you withdrew some of your pension, and then needed care in later life, which you can’t fund because your savings have dropped below £24,250 that If they find out that you have accessed your pension pot, it may be taken that you have deliberately deprived yourself of this money and they will not fund you in the care home. Unlike something you might have deliberately got rid of a few months before you needed topping up the fees, this may have taken place years before, how will you stand, and why should others pick up the pieces of paying for your care, if you spent your pot?

Pension Withdrawls

It is ironic that this was in the same email as an article saying "Care system could collapse in a decade". Some people, including a colleague think you should aim to spend all your pension savings before you need to go into care, as then "you will be too old to enjoy the money, and the council will pay anyway"

Pension withdrawals

This of course comes from an organisation which represents those who peddle "advice". They have a vested interest in seeking to control what pensioners do. After all they were the ones selling the poor value annuities people were formerly forced to buy.

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