In Focus: Vulnerability  

The dangers of drawing too much, too soon

This article is part of
How to navigate decumulation post-Covid

  • Throughout October, November and December 2020, £2.4bn was withdrawn from pensions flexibly.
  • This represents a 6 per cent increase year-on-year from £2.2bn withdrawn throughout the same months in 2019.
  • This comprised 360,000 individuals withdrawing from their pensions throughout October, November and December 2020 – a 10 per cent increase from 327,000 during the same months of 2019.
  • The total value of flexible withdrawals from pensions since flexibility changes in 2015 has exceeded £42bn.

Stevens also notes there was a 4 per cent increase in the number of individuals withdrawing compared to the previous three months.

Sophia Dimitriadis, research fellow at the International Longevity Centre UK, says: "It’s very concerning that people are taking more out of their pension – especially if these are rash decisions borne out of panic."

She points to the fact that, since the market turmoil of 2020, the value of many pension funds has recently started recovering.

"This means there is a significant risk that many people may have lost out from taking out money from their pension," she says, adding: "We also know that many people have been saving less for retirement or have had to chip at their retirement savings as a result of the pandemic’s impact on their ability to work.

"It will be especially important for these groups to save more and not less for retirement, when they are able to, to counteract this drop in saving."

Alternative statistics

But there is another way of looking at the statistics – panning out to the past six years, the rate of drawdown has been steadily rising post-pension freedoms. 

This could indicate not a pandemic-induced panic but merely a slight escalation of an already established trend. 

In fact, the Association of British Insurers says one should not be misled by the HMRC figures, taken in isolation. 

Rob Yuille, head of long-term savings at the ABI, states: "It is not true that people were taking more out of their pension pots during 2020. 

"Figures from the ABI show that while the number of people accessing their pension as a flexible income increased by 56 per cent between April and September 2020, withdrawals of all types remained below 2019 levels for that period."

So while it is true that an increasing number of pension savers started to withdraw funds, this only came "after many pressed pause at the start of the pandemic".

Comparing data when restrictions were eased in September to April when the country was in full lockdown, there is a sense of caution expressed by pensioners:

  • The number of people taking only a tax-free lump sum has increased by 55 per cent.
  • The number of people withdrawing all of their pension in one lump sum increased by 94 per cent. This increased by 51 per cent during the same period in 2019. 
  • The number of people buying a guaranteed income for life (annuity) increased by 41 per cent.

According to Yuille: "The increase in withdrawals is due to a combination of factors, including some people returning to drawdown after pausing earlier in the year due to stock market volatility and some people needing the money after a change in circumstances. "

This is also the view of Tom Selby, senior analyst for AJ Bell, who comments: "It is not clear from the available data that people have taken more out of their pensions in 2020 than in previous years.

"While the aggregate flexible withdrawals figure for [the whole of ] 2020 of £9.44bn is marginally higher than 2019 (£9.41bn), this figure has risen every year since April 2015.