7m take cash from pension pots since annuity rule changed

The so-called pension freedom rules were introduced by then chancellor George Osborne in the Budget in 2014 and saw a total overturn of the use of annuities as for the first time pension savers were able to access their cash before retirement.

Figures from the Financial Conduct Authority estimate almost seven million pension pots have been accessed for the first time in the last 10 years since the rules came into effect in April 2015.

Before pension freedoms around 75% of defined contribution (DC) pension pots were used to buy an annuity but that has slumped to less than 10% (2023-24) as annuities quickly fell out of fashion.

Rachel Vahey, head of public policy at AJ Bell, said: ‘Contrary to worries at the time, there is little evidence people rushed out to “blow” their entire pension pot on luxury items like Lamborghinis.

‘Instead, the FCA evidence shows those with larger pension pots are making sensible decisions using drawdown and annuities to make sure they have a decent income in retirement.

‘The most popular option in 2023-24 was to take income at a withdrawal rate of 8% or over. While there may be valid reasons for taking income at above 8% – people taking their income solely from one pot whilst leaving others untouched, for example – others might need more support to understand the consequences of their actions.

‘However, those drawing down pensions at over 8% largely reflects the number of small pots drawn down relatively quickly, with the average withdrawal rate falling to more moderate levels from larger pension pots.’

The cost of living crisis has also had an impact on the volume of pension drawdown.

AJ Bell analysis showed that over the last three tax years the number of pots accessed has started to increase, up almost 20% in 2023-24 compared to the previous tax year. This followed years of broadly unchanged figures.

Around 55% of pension pots accessed each tax year are fully cashed in. Over the last 10 years, AJ Bell estimates over 3,831,000 pension pots will have been fully cashed in.

Drawdown is by far the most popular option for people accessing pots of £30,000 or more, used by 60% last year.

Drawing income of 8% or more from a pension pot is common but reflects the large number of smaller pots drawn down quickly, whereas 65% of larger pots are withdrawn at a rate of 6% or less.

Many choose to fully encash pensions, although the overwhelming majority are small pots of under £30,000.

Source - Business & Accountancy Daily

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