"It may be that some people are under the impression that they have to take their money out of their pension once they ‘retire’, whilst others may regard a bank account as a ‘risk-free’ option."
In some respects, the research reinforces the findings of other studies which have shown that the Great British public has been remarkably restrained despite being able to access relatively large sums of money from their pension pot after the age of fifty five. The ‘Lamborghini’ risk seems not to have materialised, with less than a quarter of those in the latest sample taking out their money to spend on luxuries. Other surveys have suggested that those taking out lump sum cash have been most likely to withdraw sums in the £10,000 – £15,000 range, which would scarcely pay for the hubcap on a luxury sports car.
More interesting, and perhaps more worrying, is the relatively large proportion who have withdrawn their pension cash and placed it into a bank account. The Citizens Advice research, based on a sample of 500 people who have used the pension freedoms to access a DC pot since April 2015, finds that more than a quarter (29%) have put the money into a bank account. Surprisingly, this is not the preserve of those with small pension pots. On the contrary, those with pots over £100,000 are slightly more likely to have transferred the money into their bank.
What the research cannot yet tell us is whether this is a transitional step before the money is reinvested, used to run down other debts etc. or whether this is the final resting place for the money. If it is the latter, then we should certainly be concerned that people are giving up on the potential for investment growth, perhaps via a drawdown product, and are leaving their money in an account which is very unlikely to provide a positive real return.
It is not entirely clear why someone would choose to do this on a long-term basis. It may be that some people are under the impression that they have to take their money out of their pension once they ‘retire’, whilst others may regard a bank account as a ‘risk-free’ option. This latter attitude is reflected in the comments of one focus group participant who told the researchers:
“I’ve put my money in a savings account which I realise an adviser might not say is the best thing to do. I get about 1% on the current account but I’m not paying a management charge for that. My focus was to keep it safe.”
It would be an unfortunate consequence of the pension freedoms if individuals were taking large amounts of money out of their pension pot only to move them to places where the return would almost certainly be lower. Follow-up research will be needed to check the final destination of funds withdrawn in this way.
The report does not subdivide respondents according to those who took impartial financial advice, those who relied solely on the government’s free guidance service, and those who went it alone. Separate research by Royal London has found that those who have the benefit of advice generally withdraw their pension cash more slowly than those without advice. This research, and the Citizens Advice finding about widespread use of bank accounts as a repository for pensions cash, reinforces the vital importance of impartial advice and guidance for this group, not just at retirement but on an ongoing basis, including after they have exercised their pension freedoms.
