Pension Freedoms bamboozle us

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Government has published latest figures on the way people are taking their pension savings. The chart above shows a steady rise in taxable payments with payments spiking at the start of each tax year as people grab their cash for the year

They suggest that few people are paying themselves a salary in retirement from their pension savings

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Instead, they are paying themselves sums of money according to immediate need.

In a note to statistics published yesterday , a Government official comments

The number of individuals for the year and since inception totals are less than the sum of the number of individuals from each quarter or year, as some have taken payments in multiple quarters and/or years

This suggests that the majority of people accessing their pension pots are doing so as a one-off exercise , a process known as “cash-out”. Cashing a pension out is good for short-term Government revenues but can be bad news for savers who find their savings disinvested, in cash and taxable , rather than providing longer term financial security and a replacement salary for the one they lose as they retire.

The statistics show a steady increase in encasements over the period since 2015 when George Osborne allowed us to draw down from our pension pots as it pleased us.

Earlier this week, I reviewed an extremely good book by Richard Dyson and Richard Evans which is a self-help manual for people looking to convert pension savings into what they call “your retirement salary”.

It looks at three rates of withdrawal, one that simply takes the “natural yield” from a portfolio of shares and bonds and doesn’t eat into the capital, another draws down capital but at no more than 1% per year and the third is ultra conservative and allows income to roll up so that the pension pot becomes a source of inheritable wealth.

Clearly these strategies are being ignored by the vast majority of people taking their pension freedoms.

When Aon asked ordinary savers what they wanted from their pension savings 62% chose an income that replaced what they were earning before retirement. In recent correspondence with NEST’s Head of Retirement Options , Ray Chinn told me

A Nest member survey from 2017 of over 5000 members found that 34% of members expected Nest to pay them a regular income when they retire. 6% expected to use their pot in a different way and 60% didn’t know (hadn’t thought about it, didn’t understand the options or haven’t decided).
We also have anecdotal evidence from other research / focus groups that some members expect their regular income to start automatically alongside their State Pension. This seems to originate from the view that Nest is a government backed scheme so is somehow linked to the State Pension.

The message is consistent. Many people don’t know what to do when they get to retirement  .

In the absence of any proper information as to what to do, they are either doing nothing or blundering around cashing money on a seemingly random basis. If people are being driven by anything , it is tax rules, there are significant spikes in encasements at the start of each tax year.

How much longer this sorry state of affairs is going to continue is anybody’s guess. Yesterday also saw news that the Queens Speech is likely to be postponed and that the much talked of pensions bill – containing two initiatives that could help (CDC and pensions dashboard) might never be published.

All this spells bad news for those who are approaching retirement. The Money and Pensions Service say they are now in listening mode. Please listen to this.

Pension freedoms are a mess, Pensions Wise isn’t working and we badly need Government to step up and make life a little easier for the man and woman in the street.

Evans and Dyson’s self-help manual is great for the financially sophisticated investor but it does not solve problems for those who aren’t.

We need a national initiative to get people thinking about what their retirement savings will bring them in retirement and how they can use them to replace the salary that they are giving up.

your retirement salary

Required reading for the pension saver

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Pension Freedoms bamboozle us

  1. Brian G says:

    I think sometimes Henry you think you know a lot more than you actually do. You have absolutely no idea what the average person has in a pension pot because you if you ever did deal with them regularly, it was when you were flogging commission only front loaded MIPPs 30 years ago. You deal with people who have pension wealth in relative terms. For example, the people at Port Talbot are very “Pension rich” compared to the average person, whose pot is rarely worth more than £40,000. So if there are a large number of encashments from the people with average pot totals below £40,000, the alternative annuity they could buy with their pots in most cases would give them less than an extra £100 per month (if that when you factor in index-linking). Very often if they cash in their money and spend it, it is because they can then go back to claiming state funded benefits. Whilst that may be morally questionable it certainly does not disadvantage them compared to buying an annuity which permanently reduces their state benefits. Pensionwise provides a valuable explanation of how the 6 options might work for each customer who uses it, it of course does not provide financial advice, but if you are trying to say Agewage would do better in a subtle way, I think you have a long way to go in your understanding. Pensionwise is free, and people who use it truly value the service. What is more the Pensionwise guiders regularly refer to financial advisers for further help and guidance and other agencies. And contrary to your opinion, many people actually change what they were intending to do once they have had an appointment. I appreciate you are a man on a mission with your interest in AgeWage, but sometimes I feel you are not fully aware of the things you are pontificating on. Just saying ……

  2. Richard Chilton says:

    There is an implicit assumption in much of this that DC pension funds are the main source of money in retirement. For very many people, they aren’t. They are often just the icing on the cake. There are DB pensions, the state pension, income from property and inherited money or money from downsizing a home. It is difficult to understand the significance of taking some DC money without understanding the overall financial situation.

    People taking pension money are also not always retiring. They can be taking it to invest in a way not available within a pension fund.

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