The total number of pension plans accessed for the first time in 2021/22 increased by 18 per cent, according to the FCA.
According to its retirement income market data, all products witnessed an increase in 2021/22, but uncrystallized funds pension lump sums (UFPLS) saw the largest increase of 28 per cent.
Additionally, drawdowns increased by 24 per cent, while annuity sales increased by 13 per cent in 2021/22. The total amount of money taken out of pension pots increased from £37,432m in 2020/21 to £45,638m in 2021/22, a 22 per cent rise. A rate of over 8 per cent of the pot’s value was taken out annually, or over 40 per cent of regular withdrawals. Plans accessed for the first time in 2021/22 by plan holders who received regulated advice accounted for close to 33.4 per cent.
DB to DC transfers decreased further, from 30,596 in 2020–21 to 26,619 in 202–21. Additionally, the number of businesses that got DB to DC pension transfers decreased from 63 to 57.
Canada Life technical director Andrew Tully says: “Today’s data shows that the pandemic paralysis evidenced last year has clearly worn off with pension access increasing by almost a fifth. All products are experiencing a boom in interest with demand for UFPLS increasing the most by 28 per cent. Drawdowns and annuities have also clearly become more popular after experiencing a decline in interest last year.
“People are withdrawing money from their pensions in far greater numbers than last year, while this could be a reaction to the pandemic when people generally had less opportunity to purchase some of the big ticket items such as holidays and cars. On the other hand, this could be the start of people raiding their pensions to plug a gap in income or help younger relatives onto the property ladder.
“Many people who have opted to make regular withdrawals from their pensions do so at a rate of 8 per cent or more and it is the most popular withdrawal rate for all pot sizes up to £249,000. While for some, this may be a deliberate strategy to deplete pots in a specific time horizon if they have other assets to fall back on. For others, this may mean they run out of money in the years to come.
“It’s reassuring to see that a third of plans accessed were by people who had received regulated financial advice. The retirement landscape is complex with plenty of potentially costly pitfalls and a financial adviser will always be best placed to guide you safely through the options.”
AJ Bell head of retirement policy Tom Selby says: “The rise in the number of people accessing their pensions for the first time will inevitably spark fears of savers raiding their retirement pots to make ends meet during the cost-of-living crisis.
“Anyone accessing their pension earlier than planned or taking bigger withdrawals in order to cover higher living costs needs to think carefully about the impact this will have on the sustainability of their retirement income plan.
“While in some cases savers may feel dipping into their pension is the only option, it’s important to take the time to consider how decisions taken today will impact on your finances further down the line.”
He adds: “The FCA’s data suggests 4-in-10 regular withdrawals in drawdown were at an annual rate of 8 per cent or more in 2021/22, down slightly from 43 per cent in the previous year.
“Whether or not this withdrawal rate is concerning will depend on the circumstances of the individual, their health, age and the investment returns they enjoy. For example, someone who has a guaranteed defined benefit (DB) pension that covers all their living costs might be perfectly comfortable taking large withdrawals from their SIPP.
“Equally, someone who is accessing their pension later in life – for example in their mid-70s – should be able to withdraw a higher amount sustainably than someone who starts taking an income from their 60th birthday.
“The key to making drawdown work is to carefully consider the sustainability of your withdrawal plan, understand and be comfortable with the risks you are taking, and review your strategy regularly, ideally with a regulated adviser. If your investments hit the skids, particularly in the early years of retirement, you might need to tighten your belt to keep your withdrawals on a sustainable path.
“Similarly, if your investments deliver large returns then you might be able to withdraw a bit more. But for drawdown to work, you need to stay engaged – sticking your head in the sand and hoping for the best is not an option.
“As a very rough guide, experts usually say a healthy 65-year-old can safely withdraw between 3-4 per cent of the value of their fund each year and be confident it will last throughout their retirement.”
Selby says: “All retirement income options saw a surge in popularity in 2021/22, including annuities. Annuity sales have fallen off a cliff over the last decade or so, in part as a result of the paltry rates on offer and in part because of the popularity of the pension flexibilities introduced in 2015.
“Rising gilt yields has boosted the annuity rates insurers can offer, which in turn should make annuitisation a more attractive option. It is vital for UK savers that there are both healthy annuity and drawdown markets, so the rise in annuity sales and recent improvement in rates is good news.
“All-too-often retirement is presented as an ‘either/or’ choice between annuities and drawdown. In reality, the right option will generally be a combination of both. For example, you could use an annuity to cover your fixed costs in retirement, while retaining flexibility and the opportunity for investment growth with the rest.
“The annuity rate you can get also tends to get better as you get older, so it can make sense to opt for a flexible income when you’re younger before shifting to an annuity in your 70s or 80s. The key is building a retirement income plan that fits your needs and lifestyle.”
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