The Association of British Insurers has issued a warning that the average rates at which people are withdrawing money from their pension could see people running out of money in retirement if they do not have other sources of income.
In a wide-ranging report to mark five years since the introduction of pension freedoms, they have also called for that they describe as “a black hole” on guidance and advice to be plugged, and they also express concerns that the true impact of pension freedoms will not be known for decades.
Huw Evans, ABI Director General, said that: “Many of the current generation of retirees benefit from final salary pensions, which provide a guaranteed retirement income while they use other pension monies flexibly. But final salary pension schemes are in decline, and future generations will increasingly rely on pension savings without such guarantees. This makes it vital that they can access guidance and advice to help them make such decisions.”
According to FCA data, in 2018/19 nearly half (48%) of people who accessed their pension pots did so without regulated advice or guidance.
Full withdrawals have risen to their highest level. since the freedoms were introduced: 40% of withdrawals were at an annual rate of 8% and over, which is not sustainable. On average, withdrawing 3.5% from a pension pot annually should ensure a 95% chance of not exhausting savings in retirement; but withdrawing 7% only delivers a 60% chance of not running out of money. This could be a problem in the future, as more people will be relying on defined contribution pension savings.
The pension freedoms have revolutionised retirement finances, giving people greater flexibility with their pensions, including being able to take all or part of their pension pot as cash, buy an annuity to provide a guaranteed lifetime income, or to drawdown an income from the pension, while it remains invested. So far over £30 billion has been accessed from pension pots, with latest figures showing that, in 2018/9 alone, over 350,000 pension pots were fully withdrawn.
But the changes have also placed much greater responsibility on savers to ensure that they make the retirement choices that are right for them.
Yvonne Braun, ABI’s Director of Policy, Long-Term Savings and Protection, said: “Nearly five years on from their introduction, it is now time to review how the pension freedoms are working. They may have brought about a retirement revolution, but it is too soon to tell how things will turn out.
“This report highlights some warning signs. We urge Government and regulators, working with the industry, to act on our recommendations, to deliver the changes needed to improve the outcomes for present and future retirees.”
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