1.4 million older people face inadequate retirement incomes after pension freedoms day
THE report:- "Here today, gone
tomorrow" models the outcomes of 4 different approaches to using DC pension
wealth:-
1) Annuitizing.
2) Blowing the pot on big ticket items.
3) Putting
everything into a savings account.
4) Leaving the fund invested. It utilises data from the largest survey of the over 50s in England and applies these approaches to different consumer segments aged 55 to74.
It finds that, even if all those approaching retirement were to annuitize, over half (1.1 million people) will not be able to secure an adequate income unless they use non-pension assets or receive additional benefits on top of the State Pension. But in a scenario where the DC pot is used to buy big ticket items, an additional 350,000 people (1.4 million people in total) will not be able to secure an adequate income in retirement. Putting everything in a savings account also risks people running out of money before they die. We project that for those years when people have savings to draw on, they achieve a replacement rate equivalent to ⅔ of their pre-retirement income, but once their savings run out, they achieve an income of only ½ their pre-retirement income.
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Given that people typically underestimate their life expectancy by upwards of 4
years, spending savings too early is a real possibility.
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Leaving the fund invested also risks people running out of money before death as
well as exposing individuals to substantial income volatility.
► Within a balanced fund of 60% bonds and 40%
equities, we estimate that average annual income in retirement could range
between £18,000 and £12,000 until the fund runs out.
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Not everyone will be equally affected by the choices they make. There are
850,000 individuals who are at high risk of seeing big income shortfalls from
making particular decisions. Many of the individuals from this group have low
levels of financial capability allied to a high concentration of financial
wealth locked up in DC schemes.
For this group the report finds:-
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Blowing the pot would lead to a substantial fall in average projected
replacement rates; from a replacement rate of almost 70% if they annuitise, to
less than 40% if they blow the pot.
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Putting everything into a savings account could result in substantial income
falls at the end of life; from a replacement rate of over 60% when they have
some savings to less than 40% when savings run out.
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Keeping the fund invested could also result in substantial falls in income at
the end of life for this group; from a replacement rate of over 70% when they
can draw on the fund to less than 40% when the fund runs dry.
The report argues that:- "such income falls coming at the end of life could have
disastrous implications resulting in individuals cutting back on expenditure
just at a time when they may need it most; ie. to maintain basic living
standards as well as paying for long term care."
In response, the report argues that annuities must play a "key role in any
future default strategy" given their clear benefits for those who will
be highly reliant on their DC pots for retirement income. But the author's argue
that consumers must be appropriately forewarned that they will be auto-enrolled
into the product and enrolment must not occur until the individual reaches State
Pension age.
On launching the report, ILC-UK Senior Research Fellow Ben Franklin said:-
"While we do not advocate that everyone should take a particular course of
action, our analysis clearly highlights the benefits of annuitising for those
individuals who have a high concentration of wealth in DC savings. All other
stylised choices risk significant falls in income during retirement. 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".
John Lawson, Head of Policy at Aviva added:- "6 April is just the start of
the new regime and it's important not to rush into any decisions. We'd urge
those starting to look into their retirement finances to take their time to shop
around, take advice and consider all the options. We know people frequently
underestimate their life expectancy and this research underlines how crucial it
is to consider all your potential financial needs across the whole of your
retirement, not just in the short term."
