The many unknowns of the pension cash dash

Record sums of money are being withdrawn from pensions, according to figures published by HM Revenue and Customs today.

They show that £2.3 billion was cashed in from pensions in the last quarter – up from £1.7 billion in the first three months of the year.

This challenges the notion that what we have seen so far is pent-up demand that will settle down.

But most of all it highlights how little we know about what’s been happening to pensions since the freedom and choice reforms launched in 2015 with little consultation and even less preparation.

We don’t even know exactly how much has been withdrawn since savers were released from the effective obligation to buy an annuity to give them a guaranteed income on retirement.

Those in favour of pension freedom will argue that withdrawal rates are a sign that it’s popular and successful. They will also point to ostensibly modest average withdrawals of around £4,000.

At best, the reality is that we really don’t understand what’s happening. At worst, large numbers of people are facing a large drop in living standards in old age.

The unknowns

1. What are people doing with the money?

If people are withdrawing and spending their pension cash at 55, then they might struggle to retain their standard of living in old age.

If people are withdrawing their pension cash at 55, and sticking it in a cash savings account, there is a great risk that inflation will erode its value over the coming decades.

2. How much are they taking?

Average withdrawals are around £4,000, but does this number reflect the typical withdrawal rate or the average of many large and small withdrawals?

Are a lot of people emptying their pension pots? Or do they have other pensions, or alternative savings, to provide them with an income in old age?

3. Are they still working?

If so, they may face cuts in how much they can pay into their pensions in future.

The problem is that we won’t know the full impact of this for at least a decade, or possibly more.

By this point some people might have spent their pension savings. Others might have been living in constrained situations, terrified that their money might run out.

And by then the options to help people enjoy a comfortable retirement will be limited.

It would be irresponsible for government to sit back and let this situation unfold.

We need action now to help savers make good decisions to safeguard their future prosperity.

One part of this is ensuring that they have a straightforward route to providing for themselves an income that will last through their old age.