What we learned from the FCA’s retirement data

The Financial Conduct Authority (FCA) this week published its latest data on how savers have chosen to access their defined contribution (DC) savings pots in the 2022-23 financial year.

The numbers showed a year-on-year increase in the number of people taking their whole pension out as cash, as well as an increase in the number of new drawdown policies opened and a slight decline in annuity sales.

Pensions Expert has delved into the data and collected expert views on what the FCA’s data shows.

Taking the cash

• 739,535 – number of pension pots accessed for the first time in the 2022-23 financial year, up by 5% on the previous year.
• 420,727 – number of pots withdrawn in full as cash in 2022-23, up from 395,235 the year before and equivalent to approximately 56% of all pension pots accessed during the year.
• £43.2bn – total value of all pension pots accessed for the first time in 2022-23, roughly £2.4m less than the previous year.
• £5.3bn – total value of pots that were fully withdrawn in 2022-23, up from £5bn the previous year.

Stephen Lowe, group communications director at Just Group, said: “The number of pension pots being accessed each year is trending upwards as you would expect with an ageing population and most of them – nearly 57% – are full encashment and most full withdrawals are by people yet to reach state pension age.

“These may be smaller pots but the fact that the average value is £12,500 shows that these are not insignificant amounts of money and there will often be tax to pay, yet most encashments are completed without any regulated advice or guidance from Pension Wise.”

In the latest six-month period, the FCA’s data showed that of 205,000 pots cashed out in full, around two thirds were worth under £10,000 and nearly 90% were worth under £30,000.

LCP partner Steve Webb said the size of these pots, combined with falling numbers of people with DB pensions, meant that “we urgently need to boost pension pots to a size where it makes sense to keep them rather than cash them in”.

He added: “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.”

DB to DC transfers

• 18,073 – number of transfers from defined benefit (DB) to defined contribution (DC) arrangements, down by 32% from 26,619 the previous year. This marked a continuation of a longer-term decline.
• 120 – number of firms receiving DB transfers, down slightly from 116 in 2021-22.

Brian Nimmo, head of redress solutions at actuarial consultancy OAC, said the decline in transfers was likely driven in part by falling transfer values. He also cited the sharp decline in the number of financial advice firms providing advice on DB transfers following intervention by the FCA.

The lowdown on drawdown

• 218,074 – total number of new drawdown policies opened in 2022-23, up from 205,641 in 2021-22.
• £29.9bn – total value of drawdown policies opened in 2022-23, down from £31.8m the year before.

Andrew Tully, technical services director at Nucleus Financial, said: “Drawdown will remain the key retirement solution for many as it gives the flexibility to cope with changing needs in retirement. Given the ongoing freezing of the tax thresholds, being able to vary income to ensure it is taken as tax efficiently as possible is a key benefit.”

Annuities in decline

• 59,163 – number of annuities purchased in the 2022-23 period, down slightly from 60,574 the year before.
• £4.1bn – total value of annuities purchased, down by £1m from the previous year.

Just Group’s Lowe said the annuity sales figures were “surprisingly muted” given that rates during the period reached as high as 7.2% for a 65-year-old, but high inflation may have prompted more people to opt for flexible drawdown to access more cash.

A ‘dire’ picture

Paul Leandro, partner at Barnett Waddingham, said the FCA “should be worried” by the data that made the current pensions landscape seem “dire”. The industry needed to create a “much more robust at-retirement framework”, he said, that could help savers visualise their retirement prospects and understand how they might be affected if they take out too much cash in the early stages of retirement.

Leandro added: “Not enough contributions going in, coupled with too much cash being withdrawn too early, makes for a very bleak future ahead. Innovation is critical to better support people’s decision making - the best time was ten years ago, the second best time is now.”