A considerable number of pensioners could run out of cash by the age of 75 as a result of new pension reforms, charity Age UK warned on Saturday.
A new Age UK analysis – “Dashboards and Jam Jars” – showed that the reforms, which come into effect in April 2015 and allow people to withdraw money from their pensions, could result in a huge number of elderly Brits running out of money.
Age UK is convinced that this is bound to happen unless stronger safeguards are put in place.
The analysis was based on a pension pot of £29,000, which is well above average pension savings. If somebody withdrew £3,000 per year (non-index linked) from the age of sixty-five, and returns on the savings left over were 3%, by the time he/she reached the age of 75 the savings would have run out.
If the yearly withdrawal increased by an estimated annual rate of inflation, that person’s savings would be wiped out by the age of 74, the authors added.
Obviously, the less people withdrew each year, the longer the savings would last. Withdrawing £2,000 annually would result in the savings being used up by the age of 81 (or 80 if increased according to inflation).
People need to be able to trust the financial services in which we have invested, says Ms. Abrahams. (Image: Age UK).
Even a higher return, for example of 5%, would mean that somebody withdrawing £3,000 annually would run out of money by the age of 76 (or 75 if they increased with inflation).
Even modest withdrawals could leave people short
Average life expectancy in the UK for somebody aged 65 is 83 for men and nearly 86 for women. This means that even modest withdrawals would result in a considerable number of pensioners having to survive for several years with no private pension income. “For many this will mean life will become financially much tougher with some struggling to make ends meet,” Age UK wrote.
The authors also say that unless charge caps and quality standards are introduced on income drawdown products, individuals who invest their pension pots risk losing thousands of pounds of potential income.
For example, £29,000 invested in a high charging drawdown product, withdrawing £2,000 annually, with an initial set-up charge of 2%, additional annual 2% management fees, plus £150 in annual administration charge, would provide £11,000 lower income than a similar product with a single low charge of 0.75%, the authors calculated.
For somebody relying on this income to get by financially later in life, £11,000 is a great deal of money.
Age UK wrote:
“Despite the planned introduction of pensions guidance in April for those reaching pension age, Age UK is concerned that the new pension reforms – the most radical changes to private pensions in a generation – do not include enough safeguards to help people understand the impact of their decisions about their pension pots and to help them make the most of their savings.”
Age UK has put forward an 8-point plan that the Government and regulators need to take to give pensioners increased financial safeguards and confidence in the pensions industry.
The plan includes the introduction of additional money-management tools to help individuals avoid running out of funds or paying too much tax unnecessarily if money is withdrawn too rapidly.
Age UK says it is also calling for “the introduction of quality standards and regulation of charges for retirement income products likely to be introduced by the financial industry in the wake of the April’s reforms.”
The charity says action needs to be taken to prevent any increase in pension scams following the reforms. “Pension liberation scams have already cost £495 million,” the charity pointed out.
Charity Director of Age UK, Caroline Abrahams, said:
“We welcome people having more flexibility in how to use their pension savings. But that makes it even more important that we fully understand the implications and consequences of our financial decisions and can trust the financial services in which we have invested.”
“That’s why we believe that there must be additional checks and balances introduced to the pensions legislation in addition to the impartial guidance that will be available. This is too important to leave to chance. We believe, if implemented, our eight point plan would give people the added security and reassurance they need to know that they are making the most of their hard earned savings.”