New data from the latest Moneyfacts UK Personal Pension Trends Treasury Report raises questions as to whether those in drawdown are making withdrawals at sustainable rates and reveals that non-advised drawdown customers are far more likely to have fully depleted their funds than those taking advice.
The Moneyfacts research of the drawdown market, completed in Q3 2019, found that of those taking a regular income, only 30% are making withdrawals of less than 4% per annum. Of these, 12.2% are taking an annual income of up to 1.99%, and 18.6% are taking an income of between 2% and 3.99%. By contrast, almost 30% are taking an income of 8% and above and around 13% have fully depleted their fund.
Advised customers taking less than 4%
Interestingly, there are some differences between the rate of withdrawals based upon whether advice is being given. A greater percentage of advised drawdown customers (33%) are taking less than 4% compared with non-advised drawdown customers (28%). However, at the same time, a slightly higher percentage of advised drawdown customers (31%) are taking income at a rate of 8% and above compared with non-advised drawdown customers (28%).
Where a truly noticeable difference has emerged is in terms of the percentage of drawdown customers that have fully depleted their fund. Overall, 13% of all drawdown customers that have taken money from their plan have fully depleted their fund. However, the data also shows that almost three times more non-advised drawdown customers (19%) have fully depleted their funds than advised customers (6.8%). While it is still early days in the era of pension freedoms, this does suggest that non-advised drawdown customers are more likely to deplete their fund, although whether this is a deliberate strategy or unintentional is unclear.
Latest Retirement Income Market Data
The Moneyfacts drawdown research follows on from the latest Retirement Income Market data, published by the Financial Conduct Authority (FCA), which found that four in 10 (40%) drawdown customers made regular withdrawals at an annual rate of 8% or more of the fund value in the year to the end of March 2019, up from 34% the previous year, while almost three-quarters (74%) of people are taking withdrawals at a rate of 4% and over.
It is also important to note that in the Moneyfacts drawdown survey, the vast majority of drawdown customers (65%) are not actually taking any regular income at all. Breaking this down into advised versus non-advised drawdown customers, shows that a slightly higher percentage of advised customers (67%) are not taking a regular drawdown income compared with non-advised drawdown customers (63%).
Richard Eagling, Head of Pensions at Moneyfacts, said:
“Drawdown has many appealing qualities for those seeking to maximise flexibility in their retirement planning but one of the key trade-offs is that individuals have to take on longevity risk for themselves.
“The fact that those individuals going it alone with their drawdown strategies are almost three times more likely to have depleted their fund compared with those taking professional advice should be a red flag moment.
“Both the Moneyfacts research and the FCA’s data on withdrawal rates raise some potential alarms as to whether the current rate of withdrawals is sustainable, although it must be stressed that it is difficult to make any firm conclusions on the basis that neither data sets are able to show whether a plan holder has other pension plans or sources of income on which to fall back on.”