Cash being taken out of pension schemes hit a new record in 2023 according to new data from the FCA.
UFPLS or lump sum withdrawals accessed for the first time rose by 14.6% to 41,571 while the total number of pension plans accessed for the first time increased by 4.8% to more than 739,500.
Paul Leandro, a partner at consultancy Barnett Waddingham, commented: “The FCA should not be surprised by the increasing levels of cash withdrawals from pension pots, but they should be worried.
“Pension freedoms opened up Pandora’s Box - the temptation to draw cash rather than secure retirement income is great, especially in light of the cost-of-living crisis.
“Some withdrawals may be sensible and financially sound, where the individual has suitable resources - but most are not.”
Sales of annuities also decreased though the amount of money withdrawn from pension pots dropped 5% to £43.2 billion in 2023 from a year earlier.
There was also another drop in the number of transfers from final salary (DB) schemes to direct contribution (DC) schemes.
Analysis by US bank Goldman Sachs yesterday suggested that maintaining payments to pensioners in DB schemes was a reason why London’s stock market was struggling.
According to the Wall Street giant, final salary schemes are selling £2.5 billion of equities a quarter compared to DC schemes, which are buying £3 billion every three months.
That net positive of £500 million is not enough to support investment in the UK, especially as most even that money is going overseas notably toward US tech stocks.
Goldman Sachs estimates only a quarter of that money is going back into UK stocks, which added that in the 1990s, DB schemes owned half of all UK shares compared to just 3% now.
Bonds, property and other perceived lower-risked assets have pushed equities out, said the bank
DC schemes, which are growing in number, typically put a greater share of their investments in equities compared to DB schemes, which are shrinking.
Sharon Bell, at Goldman Sachs, said while DC schemes are much larger purchasers of equities became pre0meinent it would not alter the trend significantly.
“Incentives to capture these assets for UK investment along with a compelling equity-market growth story would be needed to change this.
“Of course, this is somewhat circular; there is a need for domestic investors/ownership to deepen the capital market and encourage new companies to list.”
New rules to encourage companies to list in London alongside plus incentives for retail investors such as an additional £5,000 ISA allowance have been introduced by the government to try to stimulate interest in the UK but the impact of this will take time to assess, observers say.
Meanwhile, the trend among pension schemes is not encouraging, says Leandro.
“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.”