Pensioners pause for breath after the dash for cash

published 4 November 2016

818-gran-1200 — Overexcited pensioners now seem to be calming down

More than 158,000 individuals withdrew £1.56bn from their pension savings under the pensions freedom reforms during the third quarter of this year, according to new official data from HM Revenue & Customs (HMRC). But while the figures show a substantial increase in the numbers of people taking advantage of the reforms in the second quarter of last year, immediately after the rules were changed, just 84,000 people took flexible payments from their savings the figures also suggest people are taking much smaller sums.

The typical saver making a withdrawal in the third quarter took £9,700 out of their pension fund, according to HMRC's data. That compares with an average of £18,600 during the second quarter of 2015. Financial advisers said the sharp fall in withdrawals suggests the "dash for cash" seen in the months following pensions freedom may have given way to more sensible planning.

One possibility is that the lower average withdrawal figure is evidence of large numbers of people taking advantage of "trivial commutation" rules. These make it very straightforward for savers over the age of 55 to take all of a smaller pension as a cash lump sum savers are entitled to cash in up to three pension funds worth up to £10,000 in this way.

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But the figures may also suggest that savers who are opting to make withdrawals direct from their pension funds are now taking more modest sums and leaving more invested in the hope of achieving further growth, thereby reducing the risk of their money running out. In truth, however, HMRC's figures do not include sufficient detail to provide an accurate picture of how savers are behaving.

Many advisers remain concerned that some savers will be caught out by misapplying the pensions freedom rules. One potential problem is increased tax liability. For someone with the full basic state pension, making a £9,700 pension fund withdrawal could tip them into the basic-rate tax bracket. More seriously, a £9,700 average withdrawal still looks high, given that the average pension fund in the UK is worth only £40,000. Anyone drawing down such a high percentage of their fund regularly would deplete their savings quickly, even if they continued to achieve good returns.

Always hang up onthe cold callers

Pension-related frauds have almost tripled following the pensions freedom reforms, new figures reveal, with investigators warning that the problem is even more serious than previously thought. City of London Police now estimates that the total value of pension fraud in the 12 months following the introduction of pensions freedom in April 2015 was £13.3m, 25% more than the previous estimate of £10.6m. Fraud in the previous 12 months amounted to only £5.4m.

Investigators have repeatedly warned that fraudsters view the pensions freedom reforms as an opportunity to target pension savers. Cold calls from fraudsters claiming to be financial advisers or pensions specialists appear to have increased sharply since the reforms came into force, with scammers seeking to persuade people to transfer pensions to another scheme unnecessarily, or to steal their savings outright.

Pension provider AJ Bell has launched a campaign for a complete ban on cold calling relating to investment or pensions, winning the support of Ros Altmann, the former pensions minister, who has raised the issue in the House of Lords.

Regulators urge anyone receiving cold calls to hang up. Organisations such as Pension Wise, and other bodies that offer guidance and advice, say that they would never make unsolicited contact with savers. The Financial Conduct Authority (FCA), the industry regulator, maintains a register of advisers authorised to help consumers with pensions and other financial services (see FCA.org.uk/register, or call 0800-111 6768). The FCA also keeps details of common scams and fraudulent firms and individuals.

David Prosser is a regular Money Week columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments.

David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor. He has won a number of awards, including the Harold Wincott Personal Finance Journalist of the Year, the Headline Money Journalist of the Year and the BIBA Journalist of the Year. He has also been a frequent contributor to broadcast news, providing expert advice and punditry on radio and television.

For the past ten years, David has worked as a freelance journalist, writing for a broad range of newspapers, magazines and online publications. He also writes a regular column for Forbes, and is a frequent contributor to both specialist and consumer publications.