Latest figures from HMRC show that more than a million pension savers withdrew a staggering £7.5billion from their retirement pots in the first six months of this year. That’s an increase of 17 percent compared to 2022 and experts are warning that this is unsustainable.
It’s an even bigger increase compared to 2020, with withdrawals rising 67 percent since then, although that year’s figures were distorted by pandemic lockdowns.
I’ve been warning this would happen since former Chancellor George Osborne unleashed his pension freedom reforms in 2015, abolishing the obligation to buy annuities at retirement.
Annuities were desperately poor value at the time, so I understand why the reforms were so popular. People naturally prefer to be in charge of their own money. I get that, too.
Yet annuities do one astonishing thing. They pay a guaranteed income for life no matter how long you live. As more of us live to be 100, they’ll keep paying out.
Today, the majority of savers leave their money invested in the stock market via drawdown, where there are no guarantees. People’s pots can run dry if they take too much, too soon.
I can see the appeal of drawdown. I might well do it myself. There’s a problem, though. It has never been fully tested.
In the years after 2015’s reforms, stock markets did quite well and pension savings steadily increased in value as a result.
The economy was doing reasonably well, too, so the over-55s didn’t have to dip into their savings pots as much (although they still did).
The pandemic and cost-of-living crisis have changed that.
Now the over 55s are being forced to withdraw ever bigger sums to fund essentials at exactly the same time as stock markets are falling.
Things could get worse with global shares now on the brink of a brutal crash.
The big worry is that many people who make too many withdrawals will simply run out of cash in later life. The process is already underway.
I’m not the only one worried.
Alice Guy, head of pensions and savings at Interactive Investor, says it’s “extremely worrying” that so many more people are making more and bigger withdrawals.
“Pension savings take years of dedication and hard work to build and it’s a huge concern that so many are having to dip into these savings, at potentially unsustainable rates.”
Repeated state pension age hikes have made matters worse, Guy says. “We sadly see many people in their mid-sixties struggling to make ends meet before they finally receive the state pension at 67.”
Becky O’Connor, director of public affairs at PensionBee, calls the increase in the number and value of withdrawals “concerning”.
“The risk is that people take more out to cover the rising cost of living but don’t leave enough in their pensions to get through their whole retirement.”
Pension reforms handed HM Treasury an early windfall as people pay more income tax on pension withdrawals. It’ll cost the Treasury a fortune in future, as it will pay billions in extra means-tested benefits to those who spend up their pensions and fall back on the state.
Exactly as I warned.
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Naturally, everybody was too excited at the chance to get their hands on their pension savings, and Osborne’s reforms were launched on a wave of public approval.
The problem is that drawdown puts a huge onus on people to manage their money carefully in later life, and it’s a tough balancing act.
As life expectancy rises, a typical retirement could easily last 25 or 30 years. Saving enough money to generate an income for such a lengthy period isn’t easy in the first place.
It gets even harder if people start raiding their pensiond savings in their late 50s, as many do. They may still have 35 or 40 years to live.
Pension freedoms are a slow-rolling disaster, one that is picking up speed with each additional pension withdrawal people make.
Ironically, annuity rates are a lot better than they were. With interest rates set to peak, now may also be the perfect time to lock into a lifetime income.
You don’t have to spend all your pension on an annuity. A mix-and-match approach with drawdown may work best. At least that way, some of your pension savings will last as long as you do.
