Around £3.3bn worth of money withdrawn from the pension pots of those accessing pension freedoms has been put in bank accounts, but these savers could face "double jeopardy".
Analysis by AJ Bell in the run-up to pension freedoms’ four year anniversary has found that savers face a “double jeopardy” as they risk paying unnecessary tax on withdrawals and seeing the value of their pot eroded by inflation – particularly where their bank account pays 0 per cent interest. They also miss out on the opportunity to grow their pot over the longer term by investing in the stock market,” AJ bell stated.
AJ Bell senior analyst, Tom Selby, believes that the cause of people of withdrawing money into their bank accounts may be due to a lack of trust in pensions, fears the government will tinker with the rules in the future or simply because they want to feel in control of the cash.
In total, since the pension freedoms were launched in April 2015 £23.6bn has been withdrawn from pots. A survey conducted by Censuswide last month, found that on average, regular annual pension freedoms withdrawals are 4.7 per cent of fund value – almost a third lower than 12 months ago.
However, it found that savers appear to be reacting to market volatility and Brexit uncertainty, with expected investment returns down from 4.83 per cent to 4.15 per cent. One in 10 pension drawdown investors have experienced a significant drop in fund value since entering drawdown, with around half cutting withdrawals as a result.
Commenting, AJ Bell senior analyst Tom Selby said: “Pension freedoms investors appear to be responding sensibly to difficult market conditions and Brexit uncertainty. The fact many people are adjusting their investment expectations and cutting withdrawals in response to negative returns is an encouraging sign.
“With the FTSE100 expected to provide dividend returns of 4.9 per cent in 2019, investors may be able to apply a ‘natural yield’ strategy and maintain their lifestyle in retirement without eroding their capital. This will, of course, rely on retirees taking sufficient risk and the underlying companies delivering the anticipated shareholder payouts.
“The majority of people aren’t entirely reliant on their personal pensions to provide an income in retirement, further suggesting current withdrawal levels are not a major worry. In fact, less than a third (30 per cent) are relying on their personal pensions for over 40 per cent of their annual income, while 40 per cent of respondents say these withdrawals represent less than 10 per cent of their income.”
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