Smaller pot savers have overwhelmingly voted with their feet in the wake of the first wave of pension flexibilities introduced since last year’s Budget, with data from one of the largest legacy book providers showing all but a few cashing out their funds.
Data collated by Equitable Life and disclosed to FTAdviser show a huge upswing in the amount of policyholders cashing in their pension pots of £10,000 or less, following new rules brought in following the 2014 Budget.
Known as ‘trivial commutation’, this option allows consumers to exchange small pensions for a taxable lump sum. For small pots the size of a pension that can be taken was increased from £2,000 to £10,000, with people being able to cash in up to three pots.
Equitable Life said that pre-March 2014, typically around 55 per cent of individual policyholders with funds under £10,000 purchased an annuity. Since the Budget on average a staggering 95 per cent of those retiring each month have chosen to take their entire fund as cash.
Last month the figure stood at 93 per cent. The figures include all individual policyholders retiring with a policy value under £10,000, not just those who qualify for cash, for example over 60 year-olds.
Chris Wiscarson, chief executive of Equitable Life said: “For policyholders with funds under £10,000 buying an annuity, we can see that the policyholder understands their options and have valid reasons not to take their savings as cash.
“For example, they have pension pots from other providers and wish to consolidate to provide a guaranteed income.”
The numbers are stark and could provide a portent of what can be expected when new pension freedoms come in extending the right to cash out to all savers from April.
Numbers are likely to be lower than for sub-£10k pots alone, however, as the relative merits of cashing out are greater for smaller pots which would produce an insubstantial income and that would be comparatively expensive to service.
That being said most expect many below the £30,000 combined trivial commutation threshold, the level at which providers’ drawdown option is increasingly available, to encash from April.
This could lead to a flood of cash being withdrawn: a war chest of £5.5bn has been held back from last year alone. Hargreaves Lansdown predicted last year that the Treasury could land a tax windfall of as much as £1.6bn - and that was before the Treasury upped the estimate of how many will take advantage of the reforms.