Statistics. Like so many things in life, it’s easy to bend facts and figures to support an argument or make a point. Brexit exemplified that and then some.
And so it is with pensions data. Following this morning’s publication of the first full year of pension freedom information, the headlines varied from paper to paper and website to website.
‘Some taking too much from pension pots’ said the BBC. ‘Retirees prove more prudent than expected after pension freedoms’ reported The Guardian. ‘Insurers warn that some people may be plundering pension pots too soon, raising concern money will run out’. That last one was from Thisismoney, part of the Daily Mail group. Then The Telegraph: ‘One year of pension freedoms: Over 55s make a million bank-account style payments’.
What of the original statement by the Association of British Insurers (ABI)? Its top line read ‘Majority take sensible approach, but signs some withdrawing too much too soon.’
In a story like this, is it best to take the angle given by the people who actually collated the statistics? Even then, they might have an axe to grind.
Let’s look at the facts. Pension freedoms were introduced in April last year. Put simply, these new rules allow savers to spend up to 100 per cent of their pension how they like. They are intended to prevent people from being forced into buying an annuity, which often represents poor value for money.
At the time, some commentators urged pensioners not to blow their cash on luxury holidays and flash new cars. There were genuine fears that, faced with the prospect of a substantial lump sum, older people would make hasty decisions they’d come to regret later. Others celebrated the introduction of unprecedented freedom for retirees to choose how to use their savings to fund later life.
I was with the ‘what on earth does the Government think it’s doing’ camp. The pensions minister at the time, Steve Webb, said people would be free to spend it on a Lamborghini if they wanted to – after all, there would be nothing to stop them. And what happens when the money dries up? They fall back on the State, burdening younger generations.
I’m pleased to say that, looking at the ABI’s stats, I’ve been proved broadly wrong.
Six out of ten pensioners are withdrawing money from their pension pots at a rate of around 4 per cent a year. Some 57 per cent of pensioners have withdrawn less than 1 per cent of their fund so far.
Yvonne Braun, the ABI’s director of policy, long term savings and protection, said: ‘This is our most detailed analysis of customer decisions to date following the introduction of the pension freedoms. The data shows that the freedoms have been implemented successfully, and are working as intended. New data released shows that more than half of pots are having less than 1 per cent withdrawn a quarter, which seems to indicate most people are taking a sensible approach.’
But – and this is a big but – a total of about £4.3 billion was taken out of pensions in cash, with many people taking advantage of the 25 per cent tax-free cash lump sum on withdrawal. The average cash payment was £14,500.
Indeed, in the last quarter, four per cent of pots had 10 per cent or more withdrawn, and many others are taking their whole pot in one go.
David Newman, head of pensions at Close Brothers Asset Management, said: ‘It’s clear that a minority are at risk of diminishing their pension pots too quickly – a problem that would be insurmountable should they have no further savings or assets to fall back on. It would be a nightmare scenario for many retirees to spend 40 years accumulating a pot, only to run out a few years into retirement due to a lack of planning.
‘With retirement planning more complicated than ever before, and with an ever-increasing range of options and retirement products available, taking professional advice has never been more important to help individuals fully understand the implications of their choices.’
An adviser would say that, wouldn’t he? But he has a point. If you’ve spent a lifetime building up a pension fund, taking advice on what to do with a large chunk of that money seems like a no-brainer, particularly when you consider that annuity rates have taken a battering and are more than likely to fall further following the recent decision to cut interest rates to a 300-year low.
Helen Nugent is Online Money Editor of The Spectator