Official data has indicated that the size of pension withdrawals appears to be falling. A total of 1.5 million people have withdrawn £9.2 billion from pension savings under new rules brought in by the next government.
HM Revenue & Customs data has shown that the average pension pot withdrawal is £6,000.
Under the first year of new rules, data published in March 2016 placed the average amount being cashed out at £18,600.
Experts put the fall in the size of withdrawals down to the rule-changes being successful, as well as indicating the prudence of savers.
Initially outlined in the 2014 Budget, Chancellor George Osborne announced the freedoms which would be implemented in April 2015. Instead of being required to purchase an annuity with their pension pot, individuals aged 55 would be able to take out the cash that they wished to. This could be in the form of a lump sum.
The plan was immediately subject to criticism, with certain commentators fearing the money would be spent on luxuries.
A quarter of savers’ pension pot is tax free in the majority of cases, with the amount remaining incurring tax.
Commenting on the behaviour of pension savers was Vince Smith-Hughes. The retirement expert from Prudential stated: “Our own research also shows that people with pension savings are, in the main, acting responsibly and resisting the urge to splash the cash.
“Fewer than one in 10 people in their first year of retirement last year felt they had overspent, and in fact they were far more likely to make their first year as a pensioner a frugal one than they were to buy a new car or go on a luxury holiday.”
Different types of withdrawal are not distinguished in the HMRC data.
Savers in some instances may be cashing in their entire pension value. Experts have commented that this kind of scenario is likely to occur when the pension pot is small.
However, partial and repeated withdrawals may be made by wealthier savers, who then leave the remainder invested.
Due to the lack of precise picture of how cash from pensions is being spent, some have suggested that future income problems may be the result of over-spending early on.
Pensions director at Aegon, Steven Cameron commented on the need to sustain income during the retirement period.
“The figures show the total value withdrawn remaining static, which suggests people are on average taking smaller sums.
“But people need to balance today’s income needs against what’s sustainable throughout an increasingly long retirement.”
Gareth James, pension expert at broker AJ Bell also highlighted the lack of awareness around how the money has been used and thus questioned the usability of the HMRC data.
“It is dangerous to use the £9.2bn as a measure of success when it doesn’t tell us what people are doing with that money.
“Is the money being used to provide a regular and sustainable income as pensions are designed to do? Or are savers spending it too quickly and likely to run out?”
