The number of people taking advantage of pension freedoms increased in the second quarter of this year, but while this signals an increased awareness of freedom and choice, experts say there is still a need to improve trust in the industry.
HM Revenue & Customs statistics reveal that £1.86bn was paid out to people aged 55 and over as flexible payments from pensions over the second quarter of 2017. The figure has risen from £1.59bn since the first quarter of this year, and is the largest quarterly amount paid out since freedom and choice was introduced in 2015.
The industry should work to encourage the government to establish a cross-party independent commission to set pension policy, so the public can be granted some certainty
Ian Browne, Old Mutual Wealth
Rising pension freedom payments
In the second quarter of 2015, the total value of payments was £1.56bn and 84,000 people withdrew cash from their pension pots, compared with a record 200,000 individuals withdrawing money from their pensions in Q2 2017.
The average value paid to individuals was £9,300, having fallen from an average of £18,571 in the second quarter of 2015.
The figures were released on Wednesday, two weeks after the Financial Conduct Authority's Retirement Outcomes Review interim report was published.
The watchdog’s report found accessing pots early has become more commonplace, with 72 per cent of all pots accessed before the member turned 65. Most of these withdrawals were lump sums. It also showed that more than half of pots accessed have been fully withdrawn.
David Robbins, senior consultant at Willis Towers Watson, noted that the different ways in which people take their money determine whether they are included in these figures.
"There's a danger with these statistics that people will see the number going up and say this shows more people than ever are accessing pension freedom[s], but that’s because the population of people who have started accessing their pension pots in the post-pension freedom era is bigger than it was before," Robbins said.
He pointed to the FCA’s review finding that the perception that accessing pots early is normal can influence behaviour.
It would be worrying if the news became a self-fulfilling prophecy, with individuals rushing to empty their pots quickly in reaction to the statistics, he said.
Improve trust in pensions
Rachel Vahey, product technical manager at adviser platform Nucleus, cited the importance of looking at the figures alongside the FCA’s review.
“It’s very interesting that there are significant amounts of people who are just taking money out of pensions” and rather than spending it, they are saving it somewhere else without considering potential tax implications, she said.
Source: HMRC
“We need to improve that sort of situation,” she said, noting that the FCA found a general mistrust of pensions as one of the main reasons for people withdrawing money from their pension pots.
It “seems like all the pension rules are changing every five minutes”, so a period of stability would send out a more positive image of the industry, Vahey added.
Similarly, Ian Browne, pensions expert at Old Mutual Wealth, said that while the data is encouraging, the regulator and the savings industry should “work to encourage the government to establish a cross-party independent commission to set pension policy, so the public can be granted some certainty that the roller coaster pension policy ride will finally halt”.
More in-depth analysis needed
Martin Tilley, director of technical services at Sipp provider Dentons Pension Management, stressed that it is “difficult to draw any firm conclusions” from HMRC’s latest figures, “because the data that’s provided is really the tip of the iceberg”.
He said it would be more helpful to see accurate analysis of exactly how many people were drawing out very large sums, and how many were withdrawing very small sums, to show behavioural traits.
“You’ve got to read this in conjunction with the FCA’s review” in terms of how many people are withdrawing money while taking advice, Tilley said.
He said the statistics are indicative of how more people are "embracing what the opportunities are now”, adding that “one would hope they’re using them wisely”.
More recent statistics published by HMRC show thatfrom April to June 2017 it had to repay £26.8m in excess income tax taken from people withdrawing money through pension freedoms.
Tilley said that while freedom and choice sells the idea of early access to pension pots, “it also accelerates the rate at which the Treasury obtain their tax on it”.
