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Age UK: Pensioners at risk of running out of cash a decade early

People with small pension pots are likely to run down their savings long before they die, old age charity Age UK warns.

It says someone drawing down a £29,000 pot would run out of money by the age of 75, far short of 83 or 86 the current life expectancy of a 65-year-old man and woman.

The charity’s report, written by former Which? financial services policy team leader Dominic Lindley, assumes the pensioner takes £3,000 a year in income and a 3 per cent return on the remaining savings.

The report also calls for the introduction of a charge cap on drawdown funds, an idea currently being explored by a Labour Party-commissioned consultation on decumulation products.

Age UK says people who put their pensions into drawdown arrangements are likely to receive £11,000 less in a typical high charging drawdown product than one with a 0.75 per cent charge. The figures are based on a £29,000 pot with an initial 2 per cent set up charge, a 2 per cent annual management charge and a £150 annual administration charge.

The charity supports the ‘second line of defence’ concept of extra protection for consumers at the point of retirement, due to be debated in the House of Lords next week. It also wants a review of default funds in the light of the Budget changes and an annuity clearing house to tackle the poor annuity rates offered to internal customers by some insurers.

Age UK charity director Caroline Abrahams says: “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.”

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. I know I’d rather have £3,000 for 10 years and nothing left at 75 from £30k pot at age 65! There’s a world to see and enjoy – and this has to be better for many than having a paltry £1,800 per year until death or inflation takes it away!

  2. Ahmed the wise one 12th January 2015 at 9:06 am

    I agree with the principle of free access but with a common sense approach . The lack if affordable advice is a real worry as are the comments made by the people who validate their remarks with irresponsible facts. Where is the ‘pensioner’ going to get 3% in their pension pot when they take charge?

  3. @Nelly – nicely put.

    There’s also the point that somebody with a small pot is unlikely to drawdown their pension in the uniform manner suggested. More likely they will access the pension just like other savings – on something of an ad hoc basis. Negates the need for ‘expensive’ products or advice on a carefully fine-tuned strategies that someone with a much larger pot would be wise to pay for.

  4. The report example of £29,000 is useful to demonstrate that most people in the UK will not be able to access traditional sources of financial advice either because they are not able to find a willing adviser or more likely that they won’t want to pay a minimum advice charge, which many will charge.

    However, they could achieve much much better already than the figures quoted. 3% return? Yes, from a low cost and diverse portfolio. It isn’t cash, so they would need to accept some risk of course. lower than a 2% set up charge? Yes, that can be done now (even with advice). How about lower than a 2% annual charge without that £150 fee? Yes, that can be done now fairly easily. How do I know this? It is because we do it already using existing providers and funds.

    The big shift for the market and the FCA will be the acceptance that a well developed, tightly controlled, low cost, easy access and clearly explained non-advised propositions are on the way. These are going to become the norm for the lower wealth in society and those who choose not to take advice.

    Do I support access to advice for those who want and need it? Yes. But I also support access to those who want to self select.

  5. Once again there is a failure of the academic world to understand that charge caps will lead to a self fulfilling prophecy of only 3% per year long term returns. It is all very well keeping fund management costs at 0.75% but would the regulator then control the cost of advice and cost of additional fund expenses too? And do these people seriously think that individuals can manage their drawdown investment strategy? There is so much ignorance and lack of understanding about the importance of diversification and the need to have a proper investment approach when using drawdown it is really quite frightening. It is a great concern that legislation will be passed with the objective of protecting people with small pots without thinking about the effects on people for whom drawdown is more relevant and sensible. People with pots as small as £30,000 are not really going to have a very good retirement experience whatever they do. If a pot as small as that is all they have then frankly taking an annuity or an income is hardly likely to make a significant amount of difference. Such people are going to be making their own decisions and not taking advice. So if this kind of legislation were passed the problem would be that people with more substantial pots (and/or other assets) will then not be able to have access to more sophisticated investment management strategies, which can prove to be more effective than the “sell em cheap pile em high” self service approach.

  6. The word “pension” is a silly name for investments that can be accessed at 55. A new name is required. New wine, new wineskins!

  7. It’s going to take a long, long time to reverse the public’s deeply ingrained mistrust of and antipathy towards long term saving for retirement, much of it directly attributable to endless prejudicial meddling on the part of the Labour government.

    By allowing unfettered and unlimited access to accrued retirement funds instead of stipulating a sensible limit of 7½% p.a., the current government has opened a Pandora’s box of immediate and future problems. Why has it not restored Contributions Protection (WoP) or the facility to include life cover (subject to a minimum level of ongoing contributions to retirement benefits)? Such measures would be so easy, cost the government virtually nothing and go at least some way towards making RSP’s an attractive proposition.

  8. The sheer profound nature of this report is absolutely stunning. How many of us realised I wonder that if you draw down all your money from your pension pot – you won’t have any left !!!
    Good heavens. I must go and lie down.

  9. Let the people do what they want with their small pension pots but I will not be advising them. Too much risk for the adviser. If it all goes pear shaped when advice has been given it is the Adviser who will pick up the tab yet again!

  10. Why do they use figures that bear no relationship to the level of annuity available?

    Also James Dean if people want self select why do we need to set up all these safety nets; you can’t have it both ways. If people want to go it alone then caveat emptor should prevail.

  11. At last we are getting some daylight. These new proposals are a shortcut to increased benefit payments.

    The Government doesn’t trust people to save in a pension – hence AE. So why does it trust people to use the pot wisely? In my view an annuity should be compulsory unless it can be proved that there is other income sufficient to keep the applicant out of benefits permanently.

    Two articles in todays paper also shoot down this drawdown farrago:

    1.One in three alive to day are estimated to reach age 100.

    Mark Wood (CEO JLT Employee Benefits) Has also come out in favour of annuities for the majority. His epithet was most telling:

    Annuities may be the worst way of generating a retirement income; except for all the others.”

    When will the advice community stop slavering over the prospect of continuing fees and charges and the Government eyeing early tax receipts and think of what is best for clients (whether they may like it or not)?

  12. @ Harry Katz – I agree in part – whereby the use of annuities to secure ‘necessary’ expenditure is likely to remain in a clients best interest.

    Beyond that, my view is that annuities present a lack of flexiblity, higher risk of the impact of inflation, inability to react to future changes and a potential (though common) situation whereby people typically die with excessive income given that their lifestyles change but their income stream continues to rise.

    Having said that, an annuity can provide the maximum peace of mind some people seek and therefore is an important consideration.

    It all comes down to the clients needs and attiudes – but my fear is that less ‘impartial’ (or even unregulated) ‘advisers’ will see hay ready to be made whilst the sun shines!

  13. Drawdown is not new, it’s already here and is a product mainly for the better off. Who is going to touch drawdown for a £30,000 pot? This is student politics and economics. There are expensive German cars, someone with a £30,000 pot perhaps should not buy a £30,000 car, in their world they would price all cars to say £8,000 and with it consign a whole industry to the bin.

    None of us want the fraudsters, we all, as well as clients, pay a huge amount to a regulator to control that area. We don’t need to remove advice to those with £100,000 or more through a price cap, we just need the regulator to police the fraudsters that we pay handsomely to do.

  14. I just hope that there is some mechanism in place to ensure that those that trash their pensions become ineligible for benefits. If say you have a £30k net (after TFC) lump in present circumstances that would pay around 5% for a 65 year old. Any benefits to which he may be eligible would therefore be reduced by this amount – and so forth.

    When I start to live off my pensions I don’t want to have to pay extra tax to fund the feckless, irresponsible and downright stupid.

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