July 2017 is an interesting point in the year, as the overhaul in defined contribution pensions started back in 2014 to hand more flexibility to savers continues to develop.
It is just over three months since a cap was introduced for charges related to early access to contract-based defined contribution schemes.
This saw the maximum charge of one percent of the pension value applied when drawing down, converting or transferring a pension from 55 years old for schemes existing before March 31 2017, with a freeze on schemes charges that are less than one percent, and charges on new contracts after that date cut to zero.
But it is still three months until a similar one per cent cap is introduced on trust-based DC schemes (October).
Contract versus trust: refresh our memories
Both of these are employment-related pensions, with employer and worker chipping in. They differ typically based on the size of the company and how it is managed. Larger companies tend to use the trust-based structure since they usually have a board of trustees in place who oversee the company’s defined benefit scheme. They tend to have a more hands-on role to the running and investment of the pensions, compared to contract based schemes who outsource this to a third party provider.
So the contract-based schemes were the guinea pigs in helping pensioners get more of their money?
Yes. Indeed, the ‘contract’ in the title is between the member and the pension provider. Drawing down at these new capped rates essentially cuts the amount the providers can charge for taking your money from their pot. Not good for the providers, who also saw the maximum fee they could charge for annual management slashed to to 0.75% for default funds in April 2015.
What’s been the overall trend for drawing down early?
Data from the Association of British Insurers initially showed cash withdrawals reducing: £1.4bn in the second-quarter 2015 – when the ‘pension freedom’ rule changes really kicked off – to £750 first-quarter 2016, with drawdown withdrawals slashing by a similar proportion. ABI warns, however, that quarter-on-quarter comparisons aren’t exact since it aligned with FCA data during this period, but there’s an indicative trend.
Pensions withdrawn in one go, typically smaller sums, have fallen as a quarter-on quarter average: just over £3.3bn was extracted for the first four quarters combined since flexibility (second-quarter 2015 to first quarter 2016), at a mean average of around £825m per quarter, compared with £1.627bn for the next two (second and third quarters 2016) combined, at a mean average of £813m per quarter. The average individual withdrawal has also fallen: £15,200 on average during those first four quarters, down to around £14,000 over the next two quarters.
And where might some of that extracted cash go?
Stats on those first four quarters – Q2 2015 to Q1 2016 – combined show £4.2bn flowed into guaranteed income (i.e., annuity) products at an average of £52,500, though it can’t be proven this is all cash taken from pensions. The next two quarters (Q2 and Q3 2016) combined saw £2.35bn flow into these products, at an average investment of about £57,300. So the total taken out has risen overall as a broad quarterly average, as has the average individual investment.
This is the same trend for cash flowing into flexible income products. So, potentially there was a clamour among some to take out cash and drawdown when the flexibility came in, but it was common for folk to sit on it.
Might the trend in cash-taking or withdrawals in drawdown have got a shot in the arm since the March 2017 cap?
Potentially – ABI figures lag a little, though this year it has enhanced its ‘Retirement Income’ statical collection from half-yearly to quarterly. But the Chancellor’s cut in the tax relief on early pension drawdown to £4,000 per year from £10,000) – which kicked in April this year – may have an effect. And much will need to be seen after that if trust-based DC scheme savers believe they can re-invest the proceeds in their contributions better than their companies have been.