Pension freedoms could have cost savers £2bn in lost returns, according to research from LCP, leading the firm to call for changes in how people access their retirement savings.

LCP analysed figures from the Financial Conduct Authority (FCA) that showed just over 1.7 million people took their full pension pot out in cash between April 2015 and March 2020, with 32 per cent of people putting the majority of their savings in an ISA, savings or current account to either drawdown or keep as a safety net.

This suggested around 550,000 people put retirement savings into a cash account or similar, where interest rates would be earning them 0.5 per cent or less growth on cash deposits, well below the expected pension returns of around 4.4 per cent.

LCP assumed that typical withdrawal age was 59, given that FCA data showed that over three-quarters of all full encashments are taken by those aged between 55 and 64, and that the money stayed in cash until state pension age at 67 when it is drawn in full.

From this, the firm estimated that those who had taken their pension pot in full since 2015 and put the money in a cash account would suffer a collective loss in returns of £2bn, based on 555,000 people losing an average of £3,500 each.

However, it pointed out that the problem could be even worse depending on the proportion of savers who simply leave their money in cash accounts.

As such, LCP recommended that more be done to alert consumers to the fact they are facing negative real returns, warning them that headline interest rates of 0.5 per cent and inflation standing at 2.1 per cent will see them losing out.

It also argued that savers who wanted to access cash from their pension should be able to take 25 per cent tax free but leave the rest ‘behind’ in their pension, arguing that the current available option of putting the remained in a drawdown account could be complex and involve choosing a new product or facing increased charges.

LCP partner and head of defined contribution, Laura Myers, said: “Savers who withdraw their entire pension pot and move most of it into a cash account are at risk of seriously damaging their wealth. Interest rates on cash accounts are currently well below the rate of inflation, meaning money left in such accounts for the long-term will steadily erode in value.

“The attraction of tax-free cash is well understood but it should be much easier for savers to leave the rest of their money behind inside the pension where it will continue to be invested for growth until they need it.”

LCP partner, Steve Webb, said: “Putting money in a cash account can seem safe, but the only thing that is guaranteed at the moment is that you will see your spending power decline year after year.

“For those who have already used their freedom to take their pension pot in full, more needs to be done to alert them to the real losses they will suffer if they simply park their savings in a cash account. And we need to ‘de-couple’ the act of accessing tax-free cash from accessing the rest of your pension. Unless things change, hundreds of thousands more people could find they are not making the best use of their hard-earned savings.”

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