PensionsOct 26 2016

Retirees draw down £10k a quarter post-pension freedoms

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Retirees draw down £10k a quarter post-pension freedoms

The average amount withdrawn from a private pension in the third quarter of 2016 was £9,700, figures released today (26 October) by HM Revenue & Customs reveal.

This represented an almost 50 per cent drop since the second quarter of 2015, when the average (mean) withdrawal was £18,600.

In total,  HMRC reported that £7.65bn had been drawn down from private pensions since April 2015.

HMRC began recording pension withdrawals in Q2 of 2015 in response to the introduction of pension freedoms - a policy initiated by then-chancellor George Osborne that took away limits on the amount retirees could withdraw from their pension pots.

The figures included the total value of flexible payments made from pensions, the number of individuals who have received a flexible payment, and the total value of all flexible payments reported to HMRC.

In Q2 2015, HMRC recorded 84,000 individuals received flexible payments totalling £1.56bn.

By Q3 2016, the number of individuals taking flexible payments had risen to 158,000, but the total amount had fallen to £1.54bn. 

HMRC put the increase in individuals accessing flexible payments in part down to the fact that reporting was not compulsory until April 2016. 

However, this did not have any bearing on the drop in the mean withdrawal.

Commenting on the figures, AJ Bell senior analyst Tom Selby said the drop in the mean withdrawal suggested the "dash for cash" seen in first months of pension freedoms had "tailed off", showing that people were "becoming more realistic about a sensible withdrawal level over time".

"However," he added, "an average withdrawal rate of £10,000 per person in a quarter still feels high in relation to the average pension fund size of around £40,000 in the UK.  This shows the limitations of this data. 

"To get a full picture of how successful the pension freedoms are it would be good to see what these withdrawals are being used for and to have some sense of how much people have remaining invested in pensions."

Matthew Harris, director of Harris Independent Financial Advice, said the apparently high quarterly figure did not necessarily mean retirees were drawing down too quickly on their pensions.

"A lot of that £10,000 will be clients cashing out small pensions, which won't be their only pensions.

"Quite often people use the money for paying off mortgages, home improvements, that sort of thing. They will rarely use it for frivolous things," he said.

He added that many people may be drawing down their annual tax free amount even if they don't need the income, in preparation for the future.

He said it was often tax efficient to leave that money for the time being in a bank account, or to reinvest it via an Isa.

"The magic trick with pensions is to get money out tax free," he said.

james.fernyhough@ft.com