New data shows that 42% of retirees opting for drawdown shun advice.
Data collected from the Financial Conduct Authority shows how people are accessing their pensions since new freedoms were introduced last year. Latest figures, for the third quarter of 2015 show that a total of 178,990 pensions were accessed over the period.
The newly created option that allows savers to withdraw lump sums directly from their pension (UFPLS) was the method most frequently used to access benefits. Over a third (34%) chose this method – marginally more than those who chose to access a flexible income through drawdown (known as ‘flexi-access drawdown’, 30%). With good reason in many cases, people haven’t been totally put off buying annuities, with 13% of the total number of pensions accessed being used to secure a guaranteed income.
However, many experts are concerned about the number of people who are going without financial advice. The research shows that 42% of people who went into drawdown did not use an adviser.
“That is a worry,” says Ian Price, divisional director at St. James’s Place. “Many individuals will be entering drawdown with the intention of staying invested, so it’s vitally important they’re advised on the appropriate strategy to meet their income objectives,” he adds.
And only 17% used the government’s free Pension Wise service for general guidance – which, accepting that this is no substitute for financial advice, may have been a sensible place to start for many.
Price notes that, while the new pension freedoms landscape offers choice, it also brings risk, especially to those who abandon the idea of getting financial advice. “The lack of understanding around the tax implications of withdrawing lump sums, in particular, remains a potential issue,” he observes.
The number of people cashing out their pension within the quarter was 120,969. This includes those who were accessing their pension for the first time and people who were already taking a retirement income. On the face of it, that is a surprisingly high number given the potential consequences of emptying a pension fund. But the research also reveals that the vast majority of cashed-out pensions had values of less than £30,000. A pot of this size would buy a relatively small income, so cashing out could make sense in these circumstances. The evidence continues to support the view that larger pots are staying invested to be used more prudently.
Of those drawing an income from their funds, 84% are prudently taking what is considered to be a sustainable amount, i.e. less than 4% a year. However, more than 24,000 took an income worth more than 10% of their savings.
“It’s good that most people are being responsible with their money, but a significant minority are taking a level of income that is unsustainable in the long run,” remarks Price. “The data suggests there is still a great deal that needs to be done to help those approaching retirement understand not only their choices, but the personal implications of those choices throughout their retirement years.”
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The level of income from drawdown is not guaranteed. You may need to reduce your drawdown income in the future; in particular if the performance of your investments is lower than expected, or you live to a greater age than originally anticipated when you chose your initial income level.