CONCERN grows over dash to cash in savings, writes Jeff Salway
Pension savers are falling into the traps hidden in wide-ranging reforms launched by the government last year, alarming new figures suggest.
Concerns have been expressed over the number of people entering drawdown plans without taking advice or who are losing out by failing to shop around when buying annuities.
The issues are highlighted in new Financial Conduct Authority (FCA) statistics that give the fullest picture yet of how people are taking advantage of the so-called pension “freedoms”.
The new rules, which came in last April, allow people in defined contribution (DC, or money purchase) schemes to access their entire pension pot from the age of 55 without punitive tax charges.
That provides savers with far greater choice and flexibility when it comes to taking their pension benefits. The new figures show that almost 121,000 of those who cashed in their pension between July and September 2015 took the entire pot, most of whom had pensions worth below £30,000. Less than half that number used their pension savings to secure an income, whereas most savers previously bought an annuity with their funds.
The FCA also revealed that 42 per cent of people going into drawdown plans did so without taking regulated advice.
Several pension firms now offer non-advised drawdown, but many believe these arrangements – where the pension remains invested and income is taken from it over time – are too complex to enter into without proper advice.
The risks around drawdown are numerous. One of the biggest is of taking too much income too soon and being left with an empty pension pot, said John Mortimer, head of financial planning at Shepherd & Wedderburn Financial.
“People often view their pension as a large sum of money, but with someone retiring now and possibly living for 30 years, this sum of money can easily disappear. It is really about managing expectations,” he said. “The most worrying thing is that people can now access their pension pot and end up spending the money too quickly. This can lead to a nasty jolt when the money runs out.”
That risk is exacerbated when markets are volatile, as they have been in the early days of 2016.
This is because of what’s often referred to as “pound-cost ravaging”, and which is most likely to afflict those who don’t take advice. Pound-cost ravaging occurs where the same level of income is taken from an investment even as its value declines, as typically happens during market falls.
The result is an acceleration in the rate at which the fund loses value, said Richard Leeson, Edinburgh-based wealth management expert and consultant.
“If, say, you are drawing down from a mixed portfolio of assets you might feel that a regular withdrawal of 4 per cent a year is sustainable,” he said.
“However, if the assets underperform you can find yourself looking at capital erosion. Unchecked, that capital erosion could exhaust the entire fund. When so much is at stake, the reassurance of professional advice is invaluable.”
The latest figures from the City regulator also revealed a marked increase in the number of people buying annuities from their existing pension provider without first checking the market for a better deal. The price of failing to shop around could amount to thousands of pounds over the course of retirement.
John Perks, managing director of retirement solutions at insurers LV=, said: “These latest figures on the retirement income market are extremely worrying. This means most retirees are missing out on getting the most from their retirement savings and we believe we are on cusp of a pensions mis-buying scandal.”
It seems too that in their enthusiasm for the new freedoms some savers are sacrificing valuable retirement guarantees, perhaps without realising it.
Almost 70 per cent of those holding policies containing guaranteed annuity rates – which usually pay an annual income of 10 per cent a year – either overlooked those guarantees or opted against claiming them.
“When someone realises that their 10 per cent rate only applies if they take their pension once a year, starting one year after they retire, then it becomes less appealing,” Mortimer explained.