How to avoid running out of pension savings

Retirement couple cycling

Are you spending your pension too fast? Brits aged 55 and over may be at risk of spending their pension pots too soon, a new government survey has warned. The latest report1 by Pension Wise in particular highlights the difference in spending between those who have sought their guidance and those who haven’t. In the most key finding, it reveals that 36 per cent of those who did not consult Pension Wise had spent pension savings on discretionary items such as  holidays or a new car – compared to just 14 per cent of those who had received the free guidance.

Are pension freedom fears coming true?

Pension freedom was introduced in 2015 to give people more choice when accessing their pensions. It made pension pots accessible from the age of 55 and removed the need to buy an annuity (which for most savers was previously the only viable option). Options now include taking income directly form the pension pot – ‘uncrystallised funds pension lump sums’ (UFPLS), or setting up a drawdown scheme, which invests the funds in a new portfolio designed to generate an income. The option to buy an annuity (a guaranteed income for life) remains available, as does taking a tax-free lump sum of 25 per cent. It’s also possible to combine different options to suit a person’s individual needs and preferences.

However, there were fears in the early days of pension freedom that savers would withdraw all their pots and waste the savings on luxuries. Steve Webb, the pensions minister at the time, joked that it was up to pensioners if they wanted to be sensible or ‘buy a Lamborghini’. Initially those fears proved unfounded, but this latest report suggests that some savers are indeed spending less carefully than others – and that these are the people who haven’t received guidance from Pension Wise.

How does guidance change the way people spend their pensions?

The survey highlights other differences in spending between those who have used Pension Wise and those who haven’t. Spending money on home improvements was more popular among those who hadn’t received guidance, with 28 per cent choosing to access their pensions for this, while decidedly fewer (21 per cent) chose to do this if they had first received guidance. Those who had used Pension Wise were also more likely to re-invest their money (33 per cent vs 23 per cent) or pay off loans or mortgages (17 per cent vs 9 per cent) – and were far more likely to have spent none of their pension at all yet (19 per cent vs 8 per cent).

In short, those who haven’t taken free pension guidance are more likely to have accessed their pension pots, less likely to have invested, less likely to have settled debts, and far more inclined to spend their pensions on non-essential items. Given that these will all be new pensioners, the risk is that many could be spending their pension at an unsustainable rate.

By contrast, Pension Wise users were much more cautious and less extravagant in all areas, regardless of how much actual money they had to spend. Furthermore, 23 per cent of these individuals said they had gone on to seek independent financial advice in the past year.

How are people accessing their pension pots?

The popularity of annuities plummeted in the wake of pension freedom. A year after the changes were introduced the uptake had dropped from a virtual monopoly to just 13 per cent. However the most popular method for accessing pension pots became direct withdrawals or UFPLS, rather than drawdown schemes. The reason for this seems to have been simple convenience or ignorance of the alternatives, since pension pots are not structured for withdrawals as drawdown schemes are, which means pensioners can miss out on important fund growth. It also indicates that those pensioners did not even try to shop around for a better deal.

Drawdown schemes are more sophisticated products than either annuities or UFPLS, and so setting them up generally requires professional advice. The Pension Wise survey found that 52 per cent of those with a drawdown scheme had chosen to pay for professional advice, compared to only 30 per cent who had bought an annuity or taken just a tax-free lump sum. Customer satisfaction with Pension Wise was also very strong, with 92 per cent either satisfied or very satisfied.

 


This article was previously published by Unbiased on 26th November 2018

1 Pension Wise service evaluation 2017 to 2018: customer experiences and outcomes

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