Savers have withdrawn almost £6bn from their retirement funds after the introduction of pension reforms last year.
New industry figures show that just over 213,000 cash lump sum payments totalling £3bn were made to over-55s since the changes were implemented on 6 April. On top of that, pension firms paid out £2.9bn in the form of regular sums to provide an income, said the Association of British Insurers.
The reforms introduced by George Osborne abolished the requirement to convert a pension pot into an annuity – a product that provides an income for life – and left people free to do whatever they like with their retirement cash. It means more than 300,000 people a year with defined-contribution pensions can access them as they wish, once they reach 55. They can cash in some or all of their pot and spend the money on whatever they like, although those withdrawing large sums are likely to incur a considerable tax bill.
The total amount over-55s have taken out of their pensions is lower than some commentators had predicted, with estimations that £6bn would have been withdrawn in the first four months alone.
Yvonne Braun, director of policy for long-term savings and protection at the Association of British Insurers, said: “Following some initial pent-up demand, the number of people accessing their pension pot as cash in one go has settled down. People are taking a sensible approach and considering how they will pay for their whole retirement.”
In the runup to the lifting of restrictions there were warnings that many people would blow their retirement savings on a fast car or luxury holiday, but the ABI said the figures suggested customers were not getting carried away, with initial demand for cashing in pensions settling down.
However, the average amount paid out as a lump sum is £14,800, which is enough to pay for a holiday or home improvements, but a long way short of the £180,000 or £260,000 required for a new Lamborghini Huracán or Aventador respectively.
The figures show that around £660m was paid out in cash lump sums during the final three months of 2015. This is well down on the £1.3bn withdrawn during the three months to 30 June, and the £1.2bn taken out in the period 1 July to 30 September.
The ABI said the £5.9bn total included £2.9bn paid out via 836,000 income drawdown payments, where the average payment was £3,500. Income drawdown allows savers to take out regular amounts of money while the majority of their savings remain invested.
Annuity payments have been weak in recent years due to record low interest rates, which have held down the retirement incomes that most people received in return for their savings.
However, the ABI said it was starting to see a revival in popularity for annuities, with the number sold outstripping income drawdown products for the first time during the last three months of 2015. In the first nine months of last year, £3.3bn was invested in around 61,700 annuities, making the average fund invested nearly £53,000. Despite criticism of annuities due to the low-interest environment, the products remain appealing because they provide a guaranteed income for life and will not fall in value.