Minority 'withdrawing too much too soon from pension pots'

Some people using the new pension freedoms may be plundering too much from their retirement pots too soon, insurers have warned.

The Association of British Insurers (ABI) said that while the vast majority of savers appear to be taking a "sensible approach", a small minority may be withdrawing cash at a rate that sees their money run out in a decade or less.

Launched in April 2015, the pension freedoms give the over-55s a much wider choice over how they use their retirement money.

Previously, they may have been required to use their pot to buy a fixed income called an annuity.

The ABI has released data showing how people have been taking up the reforms so far.

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The latest figures show that between January and March, 79,734 pots of varying sizes had some money withdrawn from them.

More than half (57%) of pots where money was withdrawn involved less than 1% of the total value of the pot being taken out. Some 45,641 pots had less than 1% withdrawn from them in this way.

But 4% of pots where withdrawals were made, amounting to 3,379, had 10% or more of their value taken out.

Generally, the first 25% of a pot is tax-free and the remainder is subject to tax.

The ABI said: "There are signs a minority may be withdrawing too much too soon and at rates that would see their money run out in a decade or less, if they are reliant on their pension pot as their main source of income."

But it said it cannot tell from the data whether savers taking out big chunks from their pots have other sources of income to keep their finances ticking over, for example money from property investments or other pension pots.

Yvonne Braun, the ABI's director of policy, long-term savings and protection, said: "The freedoms have been implemented successfully, and are working as intended.

"New data released shows that more than half of pots are having less than 1% withdrawn a quarter, which seems to indicate most people are taking a sensible approach.

"However, the data also suggests a minority are withdrawing too much too soon from their pension pot - 4% of pots are having a tenth or more withdrawn - and many other customers are taking their entire pot in one go.

"There may well be other factors at play here, such as people having other retirement income, for instance, final salary pensions or multiple pots. But this is a warning sign that requires further investigation."

The quarterly figures also show annuity sales have fallen, with £950 million invested, compared with £1.1 billion the previous quarter.

Annuity rates have seen some sharp falls recently amid the economic uncertainty surrounding the EU referendum.

Experts have warned that the recent cut in the Bank of England base rate to 0.25% will be a further blow to pensions.

Ms Braun continued: "The fall in annuity sales in the most recent quarter reflects ongoing pressure on rates, which will not have been helped by the recent decision to lower interest rates to a 300-year low, and further quantitative easing measures."

The ABI said across the first year that the reforms have been in place, a total of £4.3 billion has been paid out in 300,000 lump sum payments, which could involve some or all of the pot being cashed in, with an average payment of nearly £14,500.

Meanwhile, £3.9 billion has been paid out via 1.03 million drawdown payments, where money is taken as a flexible retirement income and any money left in the pot remains invested, with an average payment of £3,800.

Across the first year of the reforms, £4.2 billion has been invested in around 80,000 annuities, with the average fund invested at nearly £52,500.

Lump sum withdrawals have been decreasing since the start of the reforms, the ABI said, as pent-up demand from people looking to get their hands on their cash settles down.

In the most recent quarter, 96% of savers who took their whole pension pot were cashing in less than £10,000.

Over the first year of the reforms, 41.5% of savers buying an annuity switched to another pension provider.

The ABI said those who stuck with their existing provider may have done so after shopping around because their existing provider offered them favourable rates.

It said around half of annuity sales where customers did not switch had a guaranteed annuity rate attached.