In almost every facet of life, if more choice is offered, people will take it. Pensions are no exception with the increasing freedom the government has introduced and that came in to force 100 days ago, £1.8bn has flooded out.
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In the two months after pension rules were liberalised, nearly a quarter of a million withdrawals have been made, worth over £1.8bn, the Association of British Insurers, the trade body for pension providers, said.
The reforms gave savers aged 55 and over the choice to cash in their savings in a defined contribution fund, with no effective requirement to buy an annuity, as was the case before April.
ABI’s director for long-terms savings policy, Dr Yvonne Braun, said:
This is an important reminder that tens of thousands of people are successfully accessing the pension freedoms as intended and on the whole the industry has risen to the challenge of giving customers what they want.
The trade body data shows over £1bn was taken out in 65,000 cash withdrawals from their pension pots. The rest took the form of payments from income drawdown policies, which accounted for another 170,000 withdrawals worth £800m. The average amount taken out was £15,500.
Not surprisingly, savers have moved away from annuities. At their peak in 2012, they accounted for over 90 per cent of the total value of sales, and 10 per cent of total sales were income drawdown sales – where you leave your pot invested and take an income directly from it, instead of using the money in your pot to buy an income from an insurance company.
In April and May, £1.3bn was put into buying nearly 22,000 regular income products, with 50 per cent of this going into drawdown products rather than annuities.
Savers put in £630m to buy 11,300 annuities, compared with £720m to buy 10,300 income drawdown polices. This is a stark comparison to nearly £1.2 billion a month in sales of annuities at the peak in 2012, when only £0.1m per month was put in to drawdown products.
The data comes 100 days after pension reforms came into force.
"The data shows people with smaller pots tend to be cashing them out while those with larger pots tend to be buying a regular income product,” said Braun. “It also highlights an increase in the number of people putting money into income drawdown products that can take advantage of the new freedoms.”
We are just three months into the biggest overhaul in pensions for a generation which was introduced in only one year, so some issues remain that need to be worked through, in particular around financial advice.
The Treasury defended criticism over concerns that the reforms were risky, as a spokesperson said:
Our pension freedoms have given people real choice and freedom over how they access their savings in retirement and we welcome the ABI’s findings that show many people are shopping around for the best deal. This is a sign that our reforms are a success and that people can finally have real control over their hard earned money.