Before 2015, pensioners were obliged to buy an annuity at retirement, which guaranteed they would receive an income for life, no matter how long they lived. Former chancellor George Osborne scrapped that obligation, allowing retirees people to start using their pension as a cash machine from the age of 55.
Everybody thought it was a great idea. Osborne was praised for putting people in charge of their pension pots.
And to be fair, annuities offered lousy value at the time, as interest rates had crashed almost to zero after the financial crisis.
But as I warned repeatedly there was always going to be a problem with this.
Millions would struggle to manage their pension. They would blow it in the early years, and have nothing left.
Some would be feckless but most would do their best. The problem is, it’s not easy making a small pot of money last for 20 or 25 years.
Most people’s pensions aren’t big enough to start off with. Everyone gets hit with unexpected bills at some point, whether for their home, car, whatever. As we’ve seen lately, living costs have rocketed.
It was a recipe for disaster, especially as Osborne freed savers to make pensions withdrawals from 55, more than a decade before retirement age.
The drawdown disaster is growing by the day, as new research shows that one in three over-55s risks running out of money in retirement because they’re spending more than expected due to the cost-of-living crisis.
Some 20% of over-55s admit to being “retirement overspenders” as rising living costs force them to consistently use up more of their pension than expected.
An additional 11% say this happened early in their retirement, according to new analysis by PensionBee.
More than one in four are blowing budgets on daily living expenses such as food, drink and clothing, with housing costs such as mortgage payments and general property maintenance the second-largest cost.
PensionBee director of public affairs Becky O’Connor said overspending is a real risk as it’s hard to gauge how much you are likely to need from age 55.
“A significant chunk of today’s retirees are overspending as costs exceed their expectations.”
She urged people to assume they will overspend when calculating when they can afford to retire and how much income they need.
“This could be a wise way to minimise any nasty surprises.”
Stephen Lowe, group communications director at retirement specialist Just Group, said too many underestimate how long they will live.
“Your money may need to last for another 20 or 25 years. Making it last after you stop working could pose quite a challenge.”
This requires careful long-term planning while a stock market crash can hammer drawdown values at any time, Lowe said.
“Markets always recover but you want to avoid having to make withdrawals when shares are down and your pension is temporarily worth less as a result.”
Just’s research shows that almost two-thirds of over-55s retire before reaching today’s state pension age of 66.
“This puts extra pressure on their retirement finances because they must bridge the income gap between stopping work and starting to receive the state pension,” Lowe said.
Financial Conduct Authority data has highlighted the growing threat of people making unsustainable income withdrawals.
It found that 40% of plans are emptied at an annual rate of 8% or more. That’s double the recommended safe withdrawal rate of just 4% a year.
The truth is that millions of people in their 50s are siphoning off their pension far too quickly. Ultimately, we will all pick up the bill, as cash-strapped pensioners fall back onto means-tested state benefits to make ends meet.
The annuity was not banned. It provides a valuable protection for those who will not take advise.
The solution might be in being required to buy an annuity which doubles the State Pension for the individual before being able to facilitate flexible draw down.
The solution needs to be simple using data the state already has.
Even though I have a healthy SIPP I have been able to suspend drawdown as we have 70% of the living wage from annuities. Plus our state pensions.plus income from non pensions savings.
As our children will have difficulty saving enough and are unlikely to experience the growth in house prices that the baby boomers have then any withdrawal from an inherited pension should be subject to income tax. NNT is an important encouragement to save using pensions.
There may be much less falling back on means-tested state benefits than some seem to think. The way the system works at present, means-tested benefits in retirement will be mostly limited to those still renting their homes. And many renting their homes won’t have large pension pots to start with.
Are you saying means testing of benefits will impact those who own their own homes, and renters may escape the withdrawal of such benefits?
If so, secondary effect of such a policy could be to increase renting ( at least in old age), and the demise of the aspiration to own one’s home? ie why bother? Not surprisingly that would be a policy motive of the left, viewing property / stored capital as theft.?
Annuities were a disaster for those |richard mentions. A penny for penny reduction applies to means tested benefits so many people with small pension savings saw not a single penny in increased income from compulsory annuitisation.
As I keep saying; the annuity or drawdown decision is one of the hardest questions in personal finance and not enough advisers or their clients take it seriously
William having run a wealth management business for 50 years in London i can assure you that all of the IFAs that i have known over the years take the responsibility of advising very seriously.
Anyone who doesn’t will be bankrupted very quickly.
The education is required for the beneficiaries. We know that there are some who only have time for instant gratification probably also disregard the impact of self inflictive habits smoking, bad diet, no exercise etc Looking beyond the next paypacket is recommended.
Health is wealth
Pension freedom was a half-baked policy – retaining ‘pot conversion at-retirement’ only made sense for those who were continuing to buy an annuity. What everybody else needed was a ‘pre-retirement’ pathway with a ‘to-and-thru’ solution that delivered a stable income in retirement.