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Thousands shuffling along in 'zombie drawdown'

21 February 2019

Savers in drawdown to access tax free cash - but yet to retire - are leaving balance of pot 'untouched and unchanged'...

Man walking across bridge

Tens of thousands of savers dipping into their pensions ahead of retirement are neglecting their remaining pot – leaving them facing a savings shortfall in later life, investment platform provider Zurich has warned.

After turning 55, savers can take a 25% tax free cash lump sum from their pension but, even if they are continuing to work, they must put the remainder into invest-and-drawdown, or buy an annuity.

Research for Zurich found more than two fifths (44%) of people surveyed who have gone into drawdown to access tax free cash – but who are not intending to retire yet – will leave the balance of their pot “untouched and unchanged” until they start taking a pension income.

'Rushing' into drawdown

Experts have warned that after moving their savings into drawdown, people need to actively manage their pot, or it could veer off track.

Alistair Wilson, Zurich’s Head of Retail Platform Strategy, said: “Savers are rushing into drawdown to take out tax free cash without fully understanding how it works.

“After triggering drawdown, consumers need to monitor and adjust their portfolio to ensure market movements don’t leave them exposed to too little, or too much investment risk – yet many are planning to leave their pot dormant until they retire.

“Drawdown gives people much greater freedom and flexibility in retirement, but it doesn’t run on autopilot.  With no one at the controls, there is a danger tens of thousands of people could see their pensions veer off course.”

He added: “Taking a small amount of time to regularly review your investment portfolio, and seeking financial advice or guidance, can help ensure your pension remains on track until you need to draw an income from it.”

Dormant drawdown

The research by YouGov for Zurich surveyed more than 650 people who have moved their funds into drawdown since the 2015 pension reforms. 

Latest FCA figures show more than 435,000 people have put their pension into drawdown since the reforms, of which figure Zurich estimates 115,000 could be sitting in dormant drawdown. 

The financial watchdog is looking at decoupling the decision to access tax-free cash ahead of retirement from the decision about what to do with the remainder of the pot.

Zurich also found that consumers in drawdown are dipping into their pension for tax free cash only to leaving it to lying in low-interest cash accounts.

One in five (20%) deposited the money into a bank account, while 17% placed it in a cash ISA, where it is likely to earn little or no interest. 

Wilson said: “Consumers are withdrawing tax free pension cash and leaving it languishing in cash accounts, where a combination of low interest rates and high inflation could see the sum erode over time.  If you don’t need the money for a purpose, it can be better off leaving it inside your pension until you retire, where it can grow more efficiently.”

The numbers

Latest figures from the FCA September Data Bulletin show 435,769 people moved into drawdown between October 2015 and March 2018. 

The FCA estimates 60% of pots entering into drawdown go into zero-income drawdown (where a tax-free lump sum has been paid but no income has ever been taken_, equivalent to 261,461 people over this time period. Zurich research found 44% of people in zero-income drawdown will leave their pension untouched until they need it, equating to 115,042.

All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 660 adults whose pension is in drawdown. Fieldwork was undertaken between 3 and 15 October 2018.

Is drawdown working?

As more people move into drawdown, we have taken a look at what's working - and possibly what isn't - for the first wave of 'freedoms' retirees. Find out more here.