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

 

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 drawdown 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 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.

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