UK Insurance Sector Warns Rate of Pension Withdrawal Unsustainable

Association of British Insurers says future retirees risk running out of money.

If the current rate at which people in the UK are withdrawing cash from their pensions continues, future retirees will risk running out of money in retirement, according a report from the Association of British Insurers (ABI). And to prevent this, the group is calling on the government to reform the so-called pension freedoms.

The pension freedoms were launched in 2015 when the UK loosened the restrictions over access to pensions to allow people to withdraw their savings as they choose while only having to pay their marginal income tax rate. But the ABI said the changes have also put far more responsibility on individuals to ensure that they make the retirement choices that are right for them.

According to the ABI, more than £30 billion has been accessed from pensions since the pension freedoms were enacted, with latest figures showing that more than 350,000 pension plans were fully withdrawn in 2018 to 2019 alone. 

The ABI warns that too many people are making complex and important retirement decisions without help as 48% of people who accessed their pensions did so without regulated advice or guidance, according to the Financial Conduct Authority (FCA). The rate of withdrawal, combined with the lack of advice taken, has alarmed the ABI, which said further reforms and safeguards are needed to ensure the long-term sustainability of the pension freedoms.

“The jury is still out on the success of the pension freedoms,” ABI Director General Huw Evans said in a statement. “We will only be able to judge their true impact decades from now, once it is clear whether those who have exercised their choices have the retirement that they were hoping for.”

Citing information from the FCA, the report said that withdrawal rates of 8% and higher were the most common rate across all pension sizes except for the largest, adding that “these are not sustainable rates.” According to the Pensions Policy Institute (PPI), a withdrawal rate of 3.5% ensures a 95% chance of not exhausting savings by time of death, while a withdrawal rate of 7% gives around a 50% chance of exhausting savings by average life expectancy. That means that the current average withdrawal rate of 8% gives retirees less than a 50% of having enough money to last their retirement.

The ABI said that while this may not be a problem with retirees who have defined benefit plans or other sources of income, it will likely be a problem for retirees with only defined contribution plans.

“In the future, more people will rely on DC pensions, often exclusively,” the report said. “This means there will be much more at stake when they make retirement decision.”

The report’s key recommendations include suggestions on how to help “future proof” the pension freedoms, such as the Department for Work and Pensions sending a letter to defined benefit pension plan members who want to transfer their pension to a defined contribution warning of the risks involved; a “later-life review” from the Money and Pensions Service to help people plan during their retirement, and a retirement commission set up by the government to advise on policy changes needed for good customer outcomes in retirement. 

“While the reforms have proved very popular, and have increased people’s options at retirement, it will be decades before their full impact can be assessed,” the ABI said. “The real test of the reforms will be in the years to come, when we will see if those who have exercised their options have sufficient income in later retirement.”

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