Pension freedoms three years on - new analysis

On the eve of the third year anniversary of the pension freedoms (6 April 2018), new analysis* from AJ Bell shows:
27 March 2018
  • Average withdrawal levels look sustainable but…

  • …41% of people are withdrawing more than 10% of their fund a year

  • Pension freedom withdrawals account for just 31% of total income

  • Pension savers are expecting investment returns of 4.8% a year

  • People using pension freedoms are more likely to seek advice

Danger of unsustainable withdrawals

The average level of withdrawals being made by people already using the pension freedoms look sustainable.  The problem is that two out of every five people are making annual withdrawals of more than 10% of their fund and at these levels, withdrawals start to look unsustainable.

The average annual withdrawal amount by those using the pension freedoms is £6,612 from an average pension fund size of £104,000. 

Based on the average expected investment return of 4.83%, these withdrawal levels would last 27 years.  Bearing in mind that the vast majority (89%) of people plan to retire between the age of 60 and 70 and on average expect to live for 19 years in retirement, these withdrawal levels look sustainable.  Even if returns were significantly lower at 2% per annum, those levels of withdrawals would still last for 18 years.

However, the people who are withdrawing more than 10% of their pension savings each year are potentially going to run out of money after just eight years, even allowing for the more optimistic 4.83% investment return each year.

Perhaps not surprising then that two thirds (68%) of people are worried about running out of money in retirement.  This extends to three quarters (75%) of women and reduces slightly for men (62%).

The only saving grace is that on average, income from personal pensions only accounts for 31% of people’s overall income in retirement, so they are not reliant only on the pension freedoms.

Pension savers relying on the stock market bull-run to continue

On average people approaching or in retirement are expecting an annual investment return of 4.83%.  Men expect more at 5.02% per annum, compared to 4.62% for women.

Given that charges are likely to be at least 1% per annum, this means people need a gross investment return of almost 6% to meet their expectations and this will not be achieved without exposure to stock market investments. 

These expectations may be borne out of the fact that we are in the ninth year of a bull run and markets are near all-time highs.  The danger for investors is that this confidence in stock market returns, leads them to make withdrawals that could be unsustainable if markets were to take a down turn.

Pension freedom users are more likely to seek advice or guidance

Almost two thirds (61%) of people who have used the pension freedoms to take withdrawals from their pensions have taken some kind of advice or guidance, significantly higher than those who have not used the pension freedoms (48%).  Over half (54%) the people who have used the pension freedoms sought advice or guidance from a professional**, while one in five consulted family or friends.

Surprisingly, people who withdraw all of their pension savings as a lump sum are significantly less likely to seek advice or guidance.  Almost half (48%) of these people did not seek any kind of help compared to 31% who are using drawdown to receive a regular income and just 23% who are making ad hoc withdrawals as needed.

Tom Selby, senior analyst at AJ Bell, comments:

“At a single stroke the pension freedoms have completely changed the way people can use their pension savings.  Annuity sales have fallen off a cliff and the majority of people are now using flexible withdrawals to provide their retirement income.  Such a dramatic shift in consumer behaviour needs careful monitoring and we are only just starting to see some of the trends that are emerging now that the new rules have had a few years to bed in.

“On the whole the picture is quite encouraging, with most people making withdrawals that appear sustainable.  The danger though is that there is still a significant proportion of people that are making withdrawals at levels that have little chance of lasting as long as they need them to.  Anyone withdrawing more than 10% of their fund needs to have a careful think about whether that is a realistic level.

“You would need some outstanding investment returns to be able to maintain that over 20 or so years of retirement or you would need to be very confident that you have other sources of income that will be enough to make up any shortfall if your pension fund runs out.

“Running out of money in retirement is a concern for over two thirds of people so making sure withdrawals are being made at a realistic level is absolutely essential.”

*FWD Research questioned 1,500 British adults aged 50 – 70 on behalf of AJ Bell.  The survey took place from 28 February to 7 March 2018

**A professional is either a financial adviser, Pension Wise, pension provider or a bank. 

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