Watchdog alarmed about pensioners keeping retirement pots in cash only

Posted: 3 August 2018 11:20 am

Instead of investing, many older people are using pension drawdown schemes to stash cash.

The Financial Conduct Authority (FCA) fears people are taking what they perceive as a “safe” option of cash without realising the dangers and their missed investment opportunities.

It comes at a time when an estimated 8 out of 10 pension savers are unaware if they will have enough to live on when they retire. The FCA is now pushing the idea of making pension firms regularly alert anyone who keeps a pot in a cash fund for an extended period of time.

Drawdown is among the most flexible ways of accessing a pension. In addition, it offers potential growth through investing, though the investment returns are in no way guaranteed. Retirees can usually take up to 25% of their pension for drawdown as tax-free cash, while keeping the rest invested in the stock market.

They can then make taxable income withdrawals whenever they want. Drawdown’s flexibility can be an advantage, but it comes with increased risks as the income derived isn’t secure. If the investments made with the drawn down money perform well, it’s possible to receive a growing income throughout a person’s retirement. But people could run out of money if the investments don’t perform well, too much is withdrawn too soon, or the person lives longer than they expect.

The advice to pensioners is to ensure they have adequate secured income to deal with essential expenses before thinking about drawdown. Once the money has been drawn down there are good reasons for using cash funds rather than investing – but there are also significant downsides.

One fear is that the retirees, who currently keep their pots in cash, could well be missing out on some of the helpful investment alternatives and the FCA watchdogs are concerned too many rely on keeping their pensions in cash.

Over-55s have been given pension freedoms reforms that give them full control over their retirement savings. But according to observers, some may be making harmful decisions that are leaving them poorer or even running the risk of using up all their money too soon.

The reforms have led to some people sticking money in cash accounts where it is eaten up by inflation, while others are taking risks, without financial advice, and taking unwise punts in the stock market.

The FCA estimates that by investing in a mix of financial assets some drawdown customers could receive 37% more retirement income from their pot each year. The alternatives cited include products that hold stocks, bonds and property, rather than simply cash.

The FCA also believes people should be provided with a “more structured set of options” when they retire. Research suggests that it is not only big spenders whose retirement plans could go awry.

Two fifths of people using pension freedoms switch their retirement pots into current or savings accounts where the value can dwindle quickly because it is gobbled up by inflation and low interest rates and becomes liable for income tax.

The FCA has found that 33% of people who enter drawdown schemes without getting financial advice stick their whole pots into cash funds.

Understanding pensions is a confusing and sometimes scary business. At finder UK we start with the basics to help you decide which options are the best for you.

In simple terms, a pension should be a tax efficient way of saving for your retirement, when you can draw money from the pot you have built up, or sell the pension in return for an annuity – a regular income for the rest of your days. Find out about the options available to you with this selection.

Latest news headlines

Picture: Shutterstock

Ask an Expert

You are about to post a question on

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked provides guides and information on a range of products and services. Because our content is not financial advice, we suggest talking with a professional before you make any decision.

By submitting your comment or question, you agree to our Privacy and Cookies Policy and Terms of Use.

Questions and responses on are not provided, paid for or otherwise endorsed by any bank or brand. These banks and brands are not responsible for ensuring that comments are answered or accurate.
Go to site