Drawdown disaster! Pensioners on 'cliff-edge' as record numbers cash in pension pots early

Savers pulled money out of almost 750,000 pension pots in the 2022/23 tax year, as they battled to survive the cost-of-living crisis, according to the latest Retirement Income market update from City regulator the Financial Conduct Authority (FCA).

Of these, 420,727 pots were completely emptied, an increase of six percent from 395,235 the previous year.

The average withdrawal was £12,500, but tens of thousands took more than £30,000.

Many raided their pots to cover everyday bills during the cost-of-living crisis, or cope with spiralling mortgage rates.

Worryingly, the most common age for making total withdrawals was between 55 and 64, when people have not even reached state pension age.

In total, they accessed 294,694 pots. That’s three times the amount accessed by those aged between 65 and 74, who have actually retired.

The over 55s have been allowed to make cash withdrawals since 2015’s pension freedom reforms, despite warnings that many could deplete their savings and run out of money in later life. Many leave their pensions invested via drawdown, taking income and lump sums as required.

New FCA figures show savers accessed 739,535 pension pots for the first time in 2022/23, a rise of five percent from 705,611 the previous year.

Richard Sweetman, senior consultant at Broadstone, expressed concern as four in 10 plans saw withdrawals of eight percent or more. “That is substantially higher than the four percent rule, which is typically assumed to be a safe withdrawal rate.”

Drawdown savers who take more than four percent a year risk draining their savings too soon, he added. “It is vital pensioners access their pots sustainably to avoid a cliff-edge drop in their standard of living in later life.”

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Kirsty Anderson, retirement specialist at wealth manager Quilter, said the overall value of money withdrawn from pension pots dipped five percent to £43.2billion but was still worryingly high. “The rising costs of energy and food compelled people to dip into their retirement funds to stay afloat, albeit perhaps reluctantly.”

Fewer than one in three took regulated financial advice before making withdrawals, down on last year. The numbers booking free, government-funded Pension Wise appointments explaining their options also fell.

Anderson urged more pension savers to seek help as are pension withdrawals are “one of the biggest financial decisions you will ever make.”

Tom Selby, director of public policy at AJ Bell, warned that taking a large withdrawal could trigger an unnecessary tax bill that could have been avoided by steadily drip-feeding withdrawals. “The risk of being dragged into higher tax bands has increased due to the government’s deep freeze on income tax thresholds. “

FCA figures show savers took a record £5.3billion in cash from their pensions in 2022/23, paying income tax on three quarters of the money they withdrew.

Accessing taxable income from your pension flexibly also risks triggering the money purchase annual allowance (MPAA), which reduces the amount you can invest in a pension in future to £10,000 a year or less.

“It also revokes your ability to ‘carry forward’ unused annual allowances from the three previous tax years,” Selby added.

FCA figures also showed a 13.6 percent drop in annuity sales to 59,163 in 2022/23, despite higher interest rates.

Selby said: “Savers continue to choose retirement income flexibility and choice over a guaranteed income for life.”

While pension freedoms remain popular Selby urged savers to use them carefully. “The sustainability of a drawdown strategy will depend on your personal circumstances, including your health, age, other income sources and investment returns.”

Pension freedom reforms were always risky, in my view. The danger was that people would spend their retirement savings too soon, then fall back on the state pension and benefits. It looks like that process has begun. We will all pay the bill.