Following the release of industry pensions access data showing savers held back on pension withdrawals during lockdown, ABI's Head of Long-Term Savings, Rob Yuille, looks at what this might mean in the long-run.
When COVID-19 struck, the ABI and others in the pensions sector were concerned about a pensions panic - mass withdrawals out of fear of stock market volatility and labour market uncertainty. So far, this concern couldn’t have been more wrong. Instead, customers have been holding off in large numbers. Based on figures for March and April, there were big falls in all types of withdrawals from Defined Contribution (DC) pensions.
This begs three big questions for industry and policy makers: Why are people holding off? What happens next? And what does it mean for the wider issue of helping customers decide how to access their pension?
The changes from April 2019 to 2020 included:
- A 31.9% fall in query volumes
- A 42.2% fall in plans entering drawdown (and a 53.1% fall in plans where only a tax-free lump sum was taken)
- A 30.2% fall in full encashments
- A 56.3% fall in annuities.
There was also a fall from March 2019 to March 2020, and the fall from March to April 2020 was bigger than the corresponding change last year.
So why are customers holding off? We can look across the world and across the economy for clues.
It could be that the pressing financial need has not materialised as much as we thought it might – yet. This is counter to evidence from Australia, where early access from Super accounts was introduced and taken up in large numbers: 2.5m applications for payments totalling $18bn.
The UK’s experience could indicate less discretionary spending. It’s obvious that discretionary purchases have fallen during lockdown, and a relevant factor could be the age of people who chose not to access pensions in the UK: the ONS has found that older households spend far less of their budget on essentials (43%) and considerably more (29%) on activities that have been prevented by COVID-19, like travel.
It could also illustrate a wait-and-see approach in relation to the value of pension pots, or just the ongoing feeling of uncertainty inhibiting withdrawals. This exposes how little we know about the relationship between consumer confidence and pension access decisions.
What happens next? There is eventually likely to be a big increase, as a lull in withdrawals is likely to have created pent-up demand, and the financial need will increase for many as the furlough scheme unwinds. Though how big an increase remains to be seen, depending on how society responds to the lockdown being eased, and the impact on the economy. And if DC pension customers have begun to question whether they really need to access their pension in their 50s, it remains to be seen how long that change in attitude will last.
This period raises a further, wider question about withdrawals. The pandemic is a harsh reminder of the uncertainty of how long your retirement might last, what it will look like and what it will cost. It simultaneously shows how difficult retirement decisions are, and how inappropriate one-size-fits-all defaults would be for the retirement market.
More than ever, the pandemic has illustrated that people need to make their own judgements, and they need expert help to do so. When we start to see these figures increase again, we would hope to see use of Pension Wise and financial advice increase as well.