Three-quarters of pensioners could run out of cash with a decade of retirement left.
Older savers risk running out of money and being forced to rely on just the state pension during the last 10 years of their life, according to a study.
Nearly six years on from the introduction of pension freedoms rules that gave savers more independence over how they take their retirement pots, research by pension provider The People’s Pension suggests some people are spending their nest eggs too quickly.
In the small study of 50 savers, including 30 who were also interviewed in 2015 just after pension freedoms were brought in, a huge three-quarters were found to be burning through their cash at a rate that means, at best, they will run out of money in their early-to-mid 80s, even though many will live into their 90s.
If that happens, they would become reliant on other savings and the state pension to pay all of their bills and lifestyle expenses. Currently, the full new state pension is £175.20 per week.
The problem, according to The People’s Pension report, New Choices, Big Decisions, 5 years on, is the 2015 rule change gave people the freedom to take their pension as they wished but not the guidance or skills to plan their spending.
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“Policymakers and the retirement industry have built a system based on unrealistic assumptions about how people behave,” it says.
Savers have been flooded with information about whether to take their pension via a lump sum, an annuity or go into investment drawdown to take an income. But after that they are left to their own devices to make tough assessments about how much to spend to make their money last, the report argued.
Savers entering into drawdown are faced with “a binary option of working through the very difficult decision by themselves or paying for ongoing financial advice. Most are choosing the former, and are doing the best they can, given the impossible task we have set them,” it added.
Phil Brown, director of policy and external affairs at B&CE, the provider of The People’s Pension, said: “There is evidence that a significant number of people are sleepwalking into retirement and will have a worse quality of life in later years than could have been the case if they had been guided.
“People would be dismayed to arrive at a car dealer’s forecourt to buy a car, be presented with a selection of parts and told to a pick a selection and build their own vehicle, so why do we expect pension customers to do exactly this?”
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Average pension scheme members going it alone are “riddled with behavioural biases” that prevent them thinking about their later years. The report found they “struggle with numbers, they have no knowledge of investments, and consistently misunderstand or are ignorant of the risks they face”.
The People’s Pension wants policymakers to require pension schemes to guide members to products that match retirement risks, including living longer than they had planned for, and which will ensure that defined contribution pension savers have an income throughout their retirement.
Figures from the Office for National Statistics today show Covid-19 is having a negative effect on savers’ pension pots.
Savers paid 11% less into workplace defined contribution pension schemes as coronavirus hit the UK between Q1 (January to March) and Q2 (April to June), while employer contributions were down by 5%.
However, workplace defined contribution pension membership held firm at 23 million at the end of June 2020 – the same figure recorded three months earlier.
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