HM Treasury forecasts that it will benefit from an additional £5.1bn in a ‘bonus’ tax take by April 2019 as a result of the pension freedoms policy of 2015.
The Personal Finance Society (PFS) has warned that a majority of pension drawdowns are being transacted before consulting a financial adviser, and consumers are raiding their pension pots prematurely since the introduction of the pension freedoms initiative, and no longer buying a lifetime annuity option with their savings.
A recent Financial Conduct Authority (FCA) bulletin stated: “Drawdown has become much more popular: twice as many pots are moving into drawdown than annuities - many people have taken the tax-free cash and some people do not understand that they have moved into drawdown.”
Research recently conducted by PFS suggested that up to two-thirds of consumers are not seeking professional advice before entering into a drawdown arrangement.
PFS chief executive Keith Richards said: “This is a genuine worry: pension pots were designed to carry one through the long retirement years, buying an income for life. Now it appears that barely ten per cent of all people accessing their pension pots are opting for the safety net of an annuity. We fear many will run out of cash.
“Pensions are a hugely complex area and we fear that the vast majority of people will not be able to comprehend the dynamics of volatility drag and sequencing risk - the kind of detail that is meat and drink to a professional pensions adviser.”
The research further found that 72 per cent of pension pots have been accessed by consumers under 65, with 53 per cent of those pots being completely withdrawn. Of those pots that were fully withdrawn, 90 per cent held less than £30,000.
The government initially estimated that the pension freedoms initiative would raise £300m in 2015/16. However, it far surpassed this expectation and actually raised £1.5bn. The initiative followed a similar trend in 2016/17 by exceeding the estimated £600m and raising £1.1bn.
Though HM Treasury is benefiting from the initiative, PFS is “concerned that there is a real risk of people running out of money in their crucial retirement years” unless they seek guidance and advice from a financial planner.
Richards said: “The original costing assumed individuals would spread their withdrawals over four years, but the latest HMRC information points to larger average withdrawals than expected – and this is a concern.
“HMRC data also suggests the average tax rate on withdrawals might be higher than originally expected which could be compounding longer term financial detriment for thousands of retirees.”