Rob Yuille - Manager, Retirement Policy, ABIThe biggest changes to private pensions for a generation were introduced in April this year, based on the view that people should be trusted with their own money. Despite concerns of a ‘dash for cash’ and that providers and Pension Wise would be unable to cope, evidence is building that customer behaviour is what we might have expected, rather than what we might have feared.
However more data from the first three months shows some gaps in knowledge and some unresolved tensions about what customer outcomes will be and whether these are good enough. These are explored in Freeing the Future?, a KPMG report supported by the ABI and containing some new ABI statistics, which has just been published.
At first glance, some of the figures could be alarming:
- 71% of pension pots were accessed by taking a cash lump sum.
- Virtually all of those who took a cash lump sum - 95% - withdrew the entire fund.
- Over half of those cash lump sums were paid to people under 60.
Taken alone these might give cause for concern: large amounts of people withdrawing their entire DC pension as cash, 25 to 30 years younger than average life expectancy. We should take notice and keep an eye on it, but looking further into the numbers gives us some reassurance.
Most of those pots cashed in were small: our figures show that around half of the lump sums were less than £10,000, and around 80% of them were less than £30,000. Despite some very big withdrawals likely to be taxed at additional rate, the withdrawals on the whole were relatively small and represent just 36% of the value of pots accessed. This is likely to reflect pent up demand for cash, which also helps explain the high proportion of under-60s cashing in – it was possible to cash in pots of less than £10,000 before April, but only for those aged 60 or over. The next quarter could be quite different.
The market for retirement products is seeing significant changes. Annuity sales* by volume are around a quarter of what they were before pension freedoms, but the average pot size has increased dramatically, to well over £50,000. Conversely, drawdown sales are far higher than previously, and the average pot size is lower now that drawdown is open to a wider market. Drawdown customers can now withdraw their whole pot, and many have accessed their tax free cash but not yet taken any income. Of taxable drawdown payments, over half were for less than £1,000 and over 90% were for less than £10,000, indicating that although there are large variations, typical customer behaviour in drawdown still looks like sustainable income is the intention. This is reinforced by the numbers who appear to be continuing in capped drawdown despite the ability to cash in.
There are other gaps in our knowledge. While there have been many useful polls, there is no comprehensive and robust data on what people are doing with their money, or how this fits in to their wider financial position. The industry can help contribute to this understanding, but the absence of official information may illustrate the Government's outcome-neutral view of the policy.
The 40 industry experts interviewed for the new Freeing the Future? report, which included industry and consumer representatives, found much common ground. A consistent theme raised was the lack of clarity about the Government’s overall strategy for encouraging pensions and long-term savings, and within such a strategy, the role of pension freedoms. The reviews of tax relief and financial advice, prompted largely by pension flexibility, are welcome, but we believe they need to fit into a wider strategy.
The principle of trusting people with their own money appears to be holding up. Plenty of savers are only cashing out small pots and bigger funds are being invested in retirement income products. But before we make a wider judgment on the policy, we need to know more about the outcomes; and before policy-makers build on it, they need to articulate a clear, sustainable and joined-up strategy for long-term savings.
At our Retirement Conference in February, then Pensions Minister Rt Hon Steve Webb recommended that people stay in bed on 6 April, and wait until October to make a decision. With that date now approaching we may soon have a much fuller picture of how many people have woken up to the full implications of the pension freedoms, and whether the Government is among them.
Rob Yuille is Manager, Retirement Policy at the Association of British Insurers (ABI).
To read Freeing the Future?, the KPMG and ABI report published today, click here for a pdf version.
*As covered in the trade press, there are considerable differences between our statistics and the FCA’s. Due to different purpose, methodology and reporting the FCA annuity data did not include some providers' external annuity sales; and these factors, as well as the FCA’s wider coverage, caused differences in the drawdown statistics.