There was worrying news this week that pension drawdown users are taking out far too much cash from their pensions.

Nearly half of pension pots are being withdrawn at rates of 8% or higher, according to FCA data analysed by pension consultant Broadstone.

According to Broadstone, the number of pots being withdrawn at 8% or above is at record levels.

Unfortunately we do not know all the explanations for this and it may be that some people have good reason. They might be withdrawing from their drawdown plan because it’s tax efficient (if they haven’t used their pension tax free lump some entitlement, for example).

They may have pulled money out to help family or just because they needed the money to meet rising living costs or a financial challenge or two.

What we can say is that whatever the reasons, many are withdrawing money at an unsustainable rate, most likely because they do not understand that they will deplete their pension at a rapid rate and eventually exhaust their drawdown plan completely - probably far earlier than they ever expected.

To be fair, stock market returns have been good so far this year so some may think this is the time to take a bit more. It’s hard to know without further research.

But simply withdrawing pension income at twice the accepted 4% ‘safe’ withdrawal rate is both reckless and short-sighted.

Broadstone says the data is cause for “alarm” and they are right.

The FCA may well need to nudge pension providers to put some brakes on this level of withdrawal to at least try to protect pension savers to some degree from damaging their retirement income permanently.

The Pension Freedoms, introduced in 2015, opened the door to a pensions free-for-all I’ve always had some doubts about. Derestricting the pension market so radically was always bound to open the door to potentially reckless behaviour.

Yes, it’s reasonable to give people more freedom over what to do with the pension money but it’s not reasonable for people to ‘burn up’ their pension drawdown plan in 10 years or less, leaving them potentially to rely on the state or be forced to return to work in their 70s.

More research is needed on this emerging phenomenon but the regulators need to step up and warn consumers of the potential harm they are exposing themselves too.

The Consumer Duty requires firms to act in clients best interests at all time and it cannot be right to allow consumers to destroy the pension they have spent so many years building up due to ignorance and lack of understanding.

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Kevin O’Donnell is editor of Financial Planning Today and a journalist with 40 years of experience. This topical comment on the Financial Planning news appears most weeks, usually on Fridays but occasionally other days.  Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Follow @FPT_Kevin 

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