Thousands of pensioners could be left penniless and spending their retirement in poverty, a saving provider has warned, following news that savers have withdrawn £2.5billion since the reforms took effect.
Scottish Friendly has sounded the warning after the ABI’s figures showed that £1.3bn has been paid out in cash lump sums, with an average payment size of just under £15,000.
This suggested that there was approximately 86,000 people who have cashed in about £15,000 of their pension pots, meaning many are cashing in small dividends, the mutual said.
Calum Bennie, communications manager at Scottish Friendly, said: “We knew pension freedom would be popular, and while everyone will be relieved no Lamborghinis appear to have been purchased with pension proceeds, there is still cause to be concerned that the ABI statistics show so many relatively small pension funds are being cashed in.

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“If people are not careful, hundreds, if not thousands, of pensioners could be left penniless and spending their retirement in poverty – or forced to continue working.
“The reason for this is there remains a misconception that if an individual cashes in their pension and proceeds to spend it in its entirety, they will at least be able to fall back on the safety net of a state pension. However this is not the case.
“The ‘Deprivation of Capital’ rule means that if you simply spend your retirement fund, give it away or lose all of your money and end up needing to rely on the state for support, you will only be allowed to do so if the Government agrees with your financial decisions.”
He said: “The Government is trying to protect the taxpayer from having to pay twice to support pensioners who misuse their pension pot, but it remains unclear how the DWP will identify what will and will not be accepted as depriving yourself of capital and it gives no guidance as to how people will be allowed to spend their pensions.
“The bigger concern is that people are unaware that they might find themselves destitute if they make a poor investment decision or are just naïve with their money.”
New ABI figures for April, May and June showed £2.3bn has been used to buy nearly 37,500 regular income products, either pension annuities or income drawdown products.

The figures show, for pay outs:

• £1.1bn has been paid out via 264,000 income drawdown payments, an average payment of nearly £4,200.

Meanwhile for funds being invested into drawdown products and annuities:

• £1.3bn has been invested in 19,600 income drawdown products, an average fund size of almost £68,000.

• £990m has been invested in around 17,800 annuities, making the average fund invested just over £55,600.

• 45% of customers buying an annuity changed provider. For income drawdown purchases, this figure is 55%.

ABI’s director for long terms savings policy, Dr Yvonne Braun, said: “These figures are a testament to how well pension providers have adapted to the radical new approach to pensions which came into force on April 6. They also show the popularity of the reforms. Many thousands of people have accessed their savings to get extra cash as they approach retirement. Meanwhile annuities, which guarantee an income for life, and income drawdown are proving attractive to those with larger pension pots.”