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Savers to raid £6bn from pensions following Budget overhaul

Savers are set to raid £6bn from their pension pots in the four months following the introduction of new freedoms, Hymans Robertson predicts.

The actuarial consultancy expects the normal amount of “retiring” money – between £10bn to £15bn – to be run down more quickly than previously as drawdown products and cash withdrawals increase in popularity from April.

The firm assumes 5 per cent of the £100bn held in the pension pots of over-55s will be withdrawn this year, as well as an increased appetite for defined benefit members to move their funds to defined contribution arrangements, all adding to the total withdrawn.

Hymans has previously predicted one in three people with DB pensions will choose to transfer to DC schemes to take advantage of the new flexibilities.

Hymans partner Chris Noon says the industry needs to focus on people who access their funds without the help of an adviser and suggests a traffic light system to alert pensioners to the chances of running out of money too soon.

He says: “To meet the needs of more engaged retirees, we expect to see tools emerge that will help manage their drawdown by, for example, adjusting investment and income strategies to achieve a sustainable approach.

“Overall, we know that the vast majority of retirees don’t want to eat through their pension funds too quickly. Through the publication of calorie information, the food industry is helping people understand the longer-term implications of over-eating. If the pensions industry doesn’t do the equivalent, we will find that many who have saved conscientiously for decades with us will then overspend out of ignorance. It would be irresponsible of us if we allowed this to happen.”

Earlier today, Age UK warned members with small pension pots could run out of cash a decade early.

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. I would be interested to know how many people under the new arrangements who take their pension pots will pay tax on taking it all as a lump sum as opposed to receiving a regular income.

    Has anyone seen any estimates on what extra revenue this is likely to create for the Inland revenue?

  2. @ Derek

    Given the average/median size of pension pots, not a massive amount although more than an annuity amortised over 40 years and most likely covered by the personal allowance.

    Seems likely a relatively cost-free giveaway with the possibility of accelerated tax-revenues.

    May also make it easier for local authorities to refuse to fund long term care at outset.

  3. Derek – I expect someone gave the Chancellor some indication, although whether it will prove any more accurate than this finger-in-the-air article, who knows?

    There is a suggestion that there should be “a traffic light system to alert pensioners to the chances of running out of money too soon”. All very sweet, but what is too soon? How long wiill individual pensioners live?

  4. Claire Trott - Talbot & Muir 12th January 2015 at 2:31 pm

    Running out of cash will be a issue for many who are being told that flexi-access drawdown is the holy grail of retirement options. I suspect the guidance offered will not adequately prepare people for how long they might live, even with the discussion surrounding life expectancy as no one can give a personal accurate estimate so people will assume too long or too short.

    As we know annuities can be one of the best ways to secure income in retirement for the rest of someone life even capped drawdown protected to a certain extent and gave stiff warnings if you were drawing too much by reducing income at forced review periods – shame it was scrapped at the same time.

  5. The worrying thing is the number of people likely to partake of this Dash for Cash without first seeking guidance, let alone advice and then, when it’s all been blown on that world cruise/new kitchen/new car or some otherwise unaffordable extravagance, what will their income be?

    Allowing unfettered access to pension funds without imposing an annual cap of, say, 7½% is just opening a Pandora’s box of troubles, not to mention Webb’s stupid remark about how the government wouldn’t be bothered if people spend the money on a Lamborghini.

  6. Quote – “Through the publication of calorie information, the food industry is helping people understand the longer-term implications of over-eating.” Not if my local high street is anything to go by. Everyone knows that the point of those pie charts is that the more red on the packet, the tastier it is.

    In the financial world, everyone knows what a traffic light system means. Red = complain, amber = get ready to complain, green = I don’t know actually, I’ve never seen a green endowment letter.

    In all seriousness, the proposed traffic light system has a problem (apart from the obvious that it doesn’t take into account the holder’s other assets) which is a fundamental category error. Traffic lights go amber then red in a stable and predictable manner. When you see a light go amber you know exactly when it is going to go to red and take action – brake or continue – accordingly. People like Noon think finances work in the same way. You get an amber letter, you take action (e.g. reducing withdrawals), and you prepare for the possibility of a red if the situation gets worse. But that’s not how markets work. In the real world you have events like the credit crisis that would result in investors getting a red light letter in the post without warning. And then you might stop your income and a couple of years later after prices have recovered your next letter is green without passing through amber. If an actual traffic light worked like this there would be pile-ups everywhere.

    Hyman is a firm of actuaries and they like to think everything is as predictable as the timing of a traffic light, in the real world we know this is not true.

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