How are people spending the pension savings they withdraw?

The pension freedoms introduced in April 2015 give people more choice over what they do with their retirement savings, allowing savers to take cash withdrawals or an income drawdown rather than spending the whole lot on an annuity.

But how are people spending the money they withdraw from their pension pot?

New research from AJ Bell reveals that, even though pensions are designed to fund life in later years, only a quarter of the £17.5bn that has been flexibly withdrawn since April 2015 — a total of £4.7bn — has been spent on day-to-day living.

Surprisingly, another £3bn has been put into low-yielding bank accounts with investors facing the ‘double jeopardy´ of tax on withdrawals and low returns, the investment platform provider said, while £1.6bn has been withdrawn from pensions to invest in other products such as ISAs.

Pension savers have put £2.9bn towards paying off debt and reducing interest payments, and £1.2bn has been used to help children and grandchildren.

Meanwhile, £2.3bn has been spent on luxury items such as holidays, cars and home improvements.

The buy-to-let market has had a £1bn injection from pension savings over the past three years, with many people using pension withdrawals to invest in buy-to-let property.

Only £245m, a small proportion of the withdrawals, has been spent on entertainment such as eating out, season tickets or gambling, and £60m has been used to pay for care.

Tom Selby, senior analyst at AJ Bell, said that while an interim report from the Financial Conduct Authority (FCA) concluded that most people are not squandering their pension savings, there is evidence some savers are making “sub-optimal” retirement decisions.

“For example, 17% or £3bn of withdrawn pension money has been shoved straight into a bank account. This might not be a problem in the short-term — indeed it makes sense to have some ready-cash available in most cases — but it almost certainly isn´t an advisable long-term investment strategy, particularly with interest rates at record lows and inflation returning to the UK economy,” Selby pointed out.

“We also know that too few people regularly review their retirement income strategy — tackling this lack of engagement will be crucial in ensuring savers are equipped to make the most out of their retirement pots.”