Retirees cash out small pension pots, FCA figures reveal

Retirees raid their pension pots and fall out of love with annuities, FCA data shows. Should you take money out from your pension pot?

Stacks of coins growing in flowerpots
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An increasing number of over-55s are taking out all the cash from their pension pots rather than buying an annuity or drawdown, official figures show.

The Financial Conduct Authority's (FCA) latest Retirement Income update showed more than half of all pension pots are cashed out in full.

Between October 2022/23 around 740,000 pension funds were accessed - up 5% from the previous financial year. 

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The data showed around 57% of pots are being emptied, with the majority of those valued at £10k or less - which, according to the former pension minister Steve Webb, is a worrying sign that people are simply not saving enough and reaching retirement age with small pension pots. 

Thirty-six per cent of pots were used for drawdown and 8% per cent were used to buy an annuity in the year to October 2023.

“These figures highlight the fact that hundreds of thousands of people reach retirement each year with very small pension pots. These pots would generate very little regular income if spread out over the decades of retirement. Instead, the majority of people still judge that the best thing to do is to cash out their pension and enjoy some additional cash at the start of their retirement.  

“But with dwindling numbers of retirees having defined benefit pensions to fall back on, we urgently need to boost pension pots to a size where it makes sense to keep them rather than cash them in. With every new set of figures we see the consequences of the government’s delay in expanding automatic enrolment, and the need for urgent action to get Britain saving more for retirement,” Webb said. 

Rising living costs has also resulted in more people needing access to cash, and in particular to meet higher mortgage payments. 

Jason Hollands, managing director at Evelyn Partners, said: “One of the factors driving higher withdrawals from pensions is probably the need to aggressively pay down mortgages. For those who took out fixed rate mortgages at the record low rates available a couple of years ago, the prospect of refinancing these with interest rates at the highest levels since the 2008 global financial crisis will be a looming threat – if it hasn’t arrived already and put a dent in the household finances."

Should you take cash out of your pension? 

While it may seem like a good idea to take money out of your pension pot if it has a low value, there are things you should consider first.

  • Money kept in a pension pot maintains tax benefits. If you take the money out and put it into a savings or investment account, then you may be subject to tax on your returns. You can shield it from tax with an ISA for up to £20,000
  • Pensions often sit outside of your estate, meaning they are not liable for inheritance tax. If you take it out, the money will become part of your estate
  • If you put the money into your bank account, you could miss out on means-tested state benefits
  • Leaving it invested in your pension means your money can continue to grow.

If you want to pay off debt or help grown up children financially, then this could be a good reason to take the cash out - but remember, the pension is there to help give you income in retirement, so be sure you have enough money to live on comfortably.  It is also a good idea to check what state pension you will get - that combined with your private pension maybe give you some income worth keeping.

Annuity vs drawdown 

The data also showed retirees are falling out of favour with annuities as sales decreased by 14%.

Although according to the Association of British Insurers’ whole of year data, annuities had a bumper year in 2023, hitting £5.2 billion in sales following a rise in interest rates. 

“Given the substantial improvements in annuity rates we have seen in the last few years, you might have expected this latest FCA data dump to show a continuation of the surge in sales reported in 2021/22. In fact, annuity sales slumped 14% in 2022/23 as savers continued to choose retirement income flexibility and choice over a guaranteed income for life,” Tom Selby, director of public policy at AJ Bell, said.

When looking at annuities vs drawdown, FCA found drawdown was the most popular option with over 218,000 new drawdown policies entered into in 2022/23 - a 6% from the previous year. 

Defined benefit transfers  

FCA’s data also showed the number of people transferring out of defined benefit scheme dropped 32%, seeing more people are keep hold of the gold-plated funds regardless of how much is in them.

In total, there were 18,073 out of DB and into defined contribution plans, down 32% from 26,619 the previous year 2021/22 and a continued decline from the 30,596 in 2020/21.

Brian Nimmo, head of redress solutions at actuarial consultancy and DB redress specialists OAC, said: “Falling transfer values are likely to have accelerated that trend as pension savers increasingly see the risk in losing the value of the guarantees in a DB pension by transferring into a DC arrangement. A significant number of advisers have stopped advising on DB transfers too as they decide that increasing regulation makes it too risky for their business, and the FCA's 'polluter pays' reforms may accelerate that trend.

“DB pensions offer huge security and peace of mind for pensioners in retirement in guaranteeing a certain level of income and so, while a transfer may be the right decision for a limited pool of pensioners, we would expect volumes to continue falling over the coming years.”

Kalpana Fitzpatrick

Kalpana is an award-winning journalist with extensive experience in financial journalism. She is also the author of Invest Now: The Simple Guide to Boosting Your Finances (Heligo) and children's money book Get to Know Money (DK Books). 

Her work includes writing for a number of media outlets, from national papers, magazines to books.

She has written for national papers and well-known women’s lifestyle and luxury titles. She was finance editor for Cosmopolitan, Good Housekeeping, Red and Prima.

She started her career at the Financial Times group, covering pensions and investments.

As a money expert, Kalpana is a regular guest on TV and radio – appearances include BBC One’s Morning Live, ITV’s Eat Well, Save Well, Sky News and more. She was also the resident money expert for the BBC Money 101 podcast .

Kalpana writes a monthly money column for Ideal Home and a weekly one for Woman magazine, alongside a monthly 'Ask Kalpana' column for Woman magazine.

Kalpana also often speaks at events. She is passionate about helping people be better with their money; her particular passion is to educate more people about getting started with investing the right way and promoting financial education.