MAKING the wrong decision could leave more than a million workers without enough money to live on in the aftermath of sweeping new pension reforms, reports SARAH O’GRADY
As many as 1.4 million older people in England have little or no understanding of how the pension freedoms will affect them. And if they make the wrong decision about what to do with their money, they face a poverty-stricken retirement finance experts warn.
From April 6, people over 55 will no longer be required to buy a retirement annuity – a guaranteed income for life – with their pension pot. Those in a ‘defined contribution’ (DC) scheme will be able to access their money in one lump sum if they want to or draw it down when they need to.
But a new study examined how choices made on retirement today would impact on the amount of income a saver might receive over the next 30 years. There are fears the reforms will lead to some being reckless and blowing the lot on a Lamborghini, as Pensions Minister Steve Webb famously suggested.
There are also risks that people will do nothing in the face of complexity, putting money in high-risk investments, or taking out their money and putting it in a low interest bank account.
However the ILC-UK report, sponsored by Aviva, found the much-criticised annuity system offers people the most financial security.
Andrew Tully, pensions technical director at MGM Advantage, said: “It’s well known that people are not saving anywhere near enough for their retirement, and this is coupled with improving life expectancy, meaning many people will have to face up to some tough decisions in the future.
“There is no easy answer, but people must realise their retirement could easily last 20 years or more. With the unprecedented flexibility being introduced around pensions in April, the choices have become far more complex.
“That said, annuities will continue to offer the security and peace of mind from a guaranteed lifetime income.”
Even if savers do decide to buy an annuity, which have been attacked for offering very poor value for money over the past few years, 1.1 million have not saved enough to get a decent income unless they receive additional pensioner benefits or have assets like property or other savings.
The report – Here Today, Gone Tomorrow – used data from the English Longitudinal Study of Ageing and found that people are underestimating their life expectancy by upwards of four years.
If they decide to take their pension pot in one lump sum and live off it, there is a “real possibility” they will run out of money, the study found. Report author and ILC-UK senior research fellow Ben Franklin said: “Annuities are generally misunderstood and the group who stand to lose the most from spending everything too early, also score relatively poorly on financial capability, making them particularly susceptible to poor decision making.
“Without the appropriate support including a new default strategy, these individuals could end up significantly worse off in retirement.”
However pension expert Alan Higham, of Fidelity Investments, said the report did not examine another option available to pensioners. “An annuity does ensure that you can’t run out of money but it comes at a hefty cost,” he said.
“Using your private pension to defer taking your State pension for as long as you can gives a much higher secure income than buying an annuity so it is wrong to say the annuity is the only route.”
*Pension savers have been urged to ‘scamproof’ their savings by The Pensions Regulator ahead of next month’s changes. The Regulator has refreshed its “scorpion” campaign to alert retirement savers and pension scheme trustees to the risks of people being tricked by out of their money by cold calls and texts promising a “free pension review” or mentioning a “legal loophole”.