5 ways the over-55s are cashing in their pensions

It’s been nearly 10 years since the ‘pension freedoms’ radically changed the way that people can take money out of their pensions at retirement.

Increased flexibility has also meant more responsibility for savers to make the right choice. 

New figures from the regulator highlight what people are actually doing with their retirement savings. Which? analyses the data and explains what it all means.

What do these figures cover?

The Financial Conduct Authority (FCA) has collected information for its ‘retirement income market data’ series since April 2015. It gives insights into what people are now choosing to do when they access their pensions for the first time.

There have been concerns from the outset that people will use greater flexibility to cash in their entire savings at retirement when it might not be the best option for them. 

Giving individuals the responsibility to decide on their retirement income was a considerable gamble. Steve Webb, pensions minister at the time, speculated that people might ‘blow their pension pot on a Lamborghini’.

The latest data covers the 12 months to the end of March 2023.

We’ve picked out five key trends from the figures:

1. Cashing in entire pots

Overall, the FCA figures found that some 739,535 pension pots were accessed for the first time in 2022-23, which represents a 5% increase from the 705,661 pots accessed for the first time in 2021-22.

Nearly 421,000 pension plans were fully encashed in the year to 31 March 2023. This includes 43,000 pots, which were valued at more than £30,000.

It's hard to see how this can ever be a good idea, unless you're desperate for cash to live on in retirement. Additional tax payable on your pension savings of up to 40%, or even 45%, should dissuade most people from encashment of a sizable pot. This is where regulated advice or some help with tax planning needs to be considered.

When you're 55 or older you can withdraw some or all of your pension pot, even if you're not yet ready to retire. The first 25% of the withdrawal is tax-free.

• Find out more: figure out how much income tax you'll pay if you cash in yours with our pension tax calculator.

2. Failing to take advice

The fact that an increasing proportion of pensions are being accessed without advice or guidance should ring alarm bells. Key financial decisions are clearly being made without any support. 

Some 58% of pensions accessed in 2022-23 didn't receive advice or guidance compared with 48% in 2018-19. This translates to almost 429,000 pensions being accessed without professional help compared with 314,000 five years previously.

People seeking advice or guidance is lower in all categories of pensions compared with 2018-19. This especially stark for pension drawdown, which allows you to keep your pension invested and withdraw a regular income, and uncrystallised funds pension lump sum (UFPLS) which allows you to leave your pension invested and take cash out when you need. The proportion of plans arranged with support for pension drawdown has fallen from 75% to 61%, while UFPLS  has declined from 56% to 34%.

• Find out more: it's really important to use a financial adviser if you have a complex decision to make about your money.

3. Annuities in decline

Sales of annuities (an insurance product that allows you to buy a guaranteed income with your pension savings) registered a 14% decline in 2022-23, decreasing from 68,514 to 59,163. This is slightly surprising in that April 2022 to March 2023 covered a period when annuities rates for a 65-year-old rose from around 4.5% to 7%.

High inflation may have deterred some potential purchasers from signing up to a fixed-income product – only around one in five people who buy an annuity opt for inflation-proofing. Purchasing annuities later in retirement at higher rates looks set to become more common.

Pension drawdown continues to grow in popularity among retirees. The number of pension plans converted into drawdown rose by 6% in 2022-23 to 218,074.

In 2022-23, 48% of drawdown plans accessed were worth less than £50,000, 21% between £50,000 and £99,999, 18% between £100,000 and £249,999 and 13% in excess of £250,000.

Before you make up your mind about how to convert your fund into income at retirement, you should look into the pros and cons of annuities and pension drawdown. 

• Find out more: read our guides looking at annuities and pension drawdown.

4. Defined benefit transfers on the decline

Transfers from defined benefit (DB) or final salary pensions, which promise to pay out an income based on how much you earn when you retire, declined markedly in 2022-23.

In total, there were 18,073 DB to defined contribution (DC) pension transfers, down 32% from 26,619 the previous year (2021-22). This was a further decline from the 30,596 transfers in the previous year.

There are a couple of reasons why the number of DB transfers has dropped. The number of advisers prepared to sign off DB transfers has fallen in the wake of greater scrutiny by the regulator.

Falling transfer values have also accelerated the decline. It's often not worth savers forgoing the security and peace of mind in retirement that DB pensions ensure, guaranteeing you a certain level of income for life. 

• Find out more: find out everything you need to know about transferring a final salary pension.

5. High levels of withdrawals

The data indicated that withdrawal rates from pension drawdown plans are quite high, especially for relatively modest pots. It found that 48% of pots between £50,000 and £99,000 are being withdrawn at more than 8% a year. A further 15% of drawdown plans are being withdrawn at 6-8%.

It's smaller pension pots that have the greatest proportion of high withdrawal rates but, overall, more than half of plans are seeing regular withdrawals of 6% or over.

Making your money last in retirement is becoming a greater challenge. This will only grow as more pension savers reach retirement with greater reliance on defined contribution rather than defined benefit schemes. 

Pensioners need to access their savings in a sustainable way, taking out enough income to pay for a comfortable life, but also ensuring that the money doesn’t suddenly run out with potentially disastrous consequences. 

• Find out more: pension drawdown calculator and making your money last.