£4.7 billion | Despite pensions being designed to fund life in later years, only a quarter of withdrawals have been spent on day-to-day living |
£3 billion | One of the most surprising findings is that £3 billion is languishing in low yielding bank accounts with investors facing the ‘double jeopardy’ of tax on withdrawals and low returns |
£2.9 billion | Sensibly, almost £3 billion has been used to pay off debt and reduce interest payments |
£2.3 billion | A whopping £2.3 billion has been spent on luxury items such as holidays, cars and home improvements |
£1.6 billion | Rather bizarrely, £1.6 billion has been withdrawn from pensions to invest in other products such as ISAs |
£1.2 billion | The bank of mum and dad (or maybe grandparents) is well and truly open for business with £1.2 billion being used to help people’s children |
£1 billion | The buy-to-let market has had a £1 billion injection over the past three years with many people using pension withdrawals to invest in property (buy-to-let) |
£245 million | Despite stories of boozing and gambling, only a tiny fraction of withdrawals have been spent on entertainment such as eating out, season tickets or gambling |
£60 million | A tiny proportion of withdrawals have been used to pay for care |
£500 million | Other |
£17.5 billion | Total |
Tom Selby, senior analyst at AJ Bell, comments:
“Regulators and policymakers have understandably been playing catch-up in the four and a bit years since former Chancellor George Osborne uprooted the UK retirement market.
“The pension freedoms, while hugely popular, were undoubtedly announced with politics rather than practicalities in mind. And because the reforms were almost entirely untested, it has taken the Financial Conduct Authority (FCA) a while to build a picture of consumer behaviour and recommend any possible market remedies.
“While the FCA’s interim report concluded most people are not squandering their hard-earned pensions, there is evidence some savers are making sub-optimal retirement decisions.
“For example, 17% or £3 billion of withdrawn pension money has been shoved straight into a bank account. This might not be a problem in the short-term – indeed it makes sense to have some ready-cash available in most cases – but it almost certainly isn’t an advisable long-term investment strategy, particularly with interest rates at record lows and inflation returning to the UK economy.
“We also know that too few people regularly review their retirement income strategy - tackling this lack of engagement will be crucial in ensuring savers are equipped to make the most out of their retirement pots.
“There are various things that could help here, including boosting access to advice and shifting away from rigid communications rules so savers are nudged into action at points in their lives when they are ready and willing to make decisions.
“The proposal for people to be given a ‘mid-life MOT’ to assess their financial health and the wider work on engaging the self-employed to save for retirement could provide a spark for greater levels of innovation in this area, although this will require buy-in from both politicians and the regulators.”
Shopping around and ‘default pathways’
“With roughly two people now entering drawdown for every one person who buys an annuity, the regulator understandably wants to ensure savers aren’t sleepwalking into a bad retirement income deal. “Unfortunately to date the FCA’s thinking has been stuck in the past, viewing drawdown as a ‘product’ similar to an annuity and suggesting interventions – in this case so-called ‘default pathways’ – to solve the perceived problem that drawdown customers aren’t shopping around before they ‘buy’.
“With the line between accumulation and decumulation becoming increasingly blurred, there is no obvious reason why entering drawdown should lead to a product switch or change in investment strategy.
“In fact by creating a default option the FCA risks hard-wiring poor engagement into the UK retirement system at a time when we should be focusing on doing the exact opposite.
“If the FCA does throw its weight behind default pathways – and it was interesting to note the Government’s recent opposition to this – it will need to address a number of practical issues that could arise. It is not yet clear how the opt-out process could work or how many funds providers would be required to offer, for example.
“More fundamentally, if the regulator does propose default retirement pathways they will never be a substitute for taking an active interest in your drawdown strategy.”
*Based on a survey conducted by FWD on behalf of AJ Bell of 370 people who have accessed their pension flexibly since April 2015. Survey responses were applied to the £17.5billion flexible withdrawals made from pensions since April 2015 (Source: HMRC newsletters).