DIY Investor Magazine
/
December 2015
26
SAGA LOUTS WARNED THEY
COULD RUN OUT OF MONEY
Light-hearted articles following the introduction of
the new pension freedoms predicted queues outside
Harley Davidson and Fred Olsen offices whilst secretly
believing that, on the whole, pensioners were sensible
types and may even adopt a more austere lifestyle for
fear of emptying the tank.
However, having studied countries where similar
retirement freedoms are well established, a report by
the Social Market Foundation warns that if those at
Skeggy emulate the spending patterns seen on Bondi
or Venice, the State could be facing a huge tab to prop
up those that have burned through their pension pot.
There are 2.2 million people in the UK aged 55-70
invested in defined contribution schemes and early
analysis by the Treasury suggested that around 30%
would spend their pot at a faster rate than via an
annuity.
However, the study shows that if British pensioners
spent their pots in the way that Australians have (11.6%
of total pot per year) 40% would run out of funds by
age 75, just ten years into retirement and well short of
the current life expectancy of 87 for a man and 89 for a
woman.
Americans are, apparently, more cautious, spending
8% p.a. but even if Brits reined in to this level men
and women would still face five and seven years
respectively with no private pension income.
The fears of the survey do appear to have some
foundation on the basis that in the three months after
April, 200,000 people exploited flexible access to their
pot via draw-down or lump sum withdrawals; a total
of £2.7 billion was taken at an average of £13,500 per
person which, ironically, has delivered a windfall to
the Chancellor that has, in part, allowed him to bow to
pressure to pare back working tax credits. The survey
concluded that the new flat rate state pension that kicks
in next year should prevent those exhausting their fund
Pension freedoms introduced in April gave those reaching age 55 total freedom over what to do with their pension
pot, but a recent survey reveals that thousands could run out of cash many years before they die
falling into ‘poverty’ – considered to be 60% of typical
median income – but many could be rendered ‘low
income’ by surviving on less than 70% of it.
Just one explanation for the profligate behaviour Down
Under could be the fact that there is a means-tested
state pension as a safety net which, although that is not
the case in the UK, other benefits that those running
dry could attract such as social care funding and
council tax benefits, are.
It appears that pension freedoms were introduced
without any real cognition of how people would behave
and just how serious the ramifications could be if a
very large proportion of the UK’s population decided to
party like its 1959.
If there are lessons to be learned, faced with a
huge bill for picking up the pieces, the Australian
government has recently announced a ‘default path’
where a proportion of a pot can be put in a fund
guaranteeing an income for life; like, er, an annuity.
Here, the government has shunned this idea, preferring
to monitor pensioners’ circumstances and flagging up
looming, potentially unwelcome, outcomes.
Products delivering income and certain outcomes
are mainstays of DIY investor and we are committed
to delivering education and information to empower
people to plan for, and take full advantage of,
retirement. It is necessary to take professional advice.
