New analysis by Age UK warns that changes coming in April that will allow people to take money from their pension savings could leave signifanct numbers of older people running out of money in retirement.
The report, Dashboards and jam-jars, shows someone on a £29,000 pension pot and withdrawing £3,000 a year (non-index linked) from the age of 65 will run out of money at 75.
Their money will last longer if they draw only £2,000 each year, but only until age 81.
The report’s calculations are based on a pension pot well above the typical pension savings and 3% returns on the remaining savings.
Even if returns on remaining savings are higher at 5%, someone withdrawing £3,000 a year will still run through their savings by the time they reach 76.
The average life expectancy at age 65 is currently just over 83 for men and just under 86 for women.
Even modest annual withdrawals will mean a significant number of pensioners risk having to survive for several years at the end of their lives without any income from their private pensions.
For many this will mean life will become financially much tougher with some struggling to make ends meet.
Calls for charge caps
The report also reveals that unless quality standards and charge caps are introduced on income drawdown products, people who invest their pension pots are at risk of losing thousands of pounds of potential income.
For instance, the report calculates that a £29,000 pension pot invested in a high charging drawdown product, drawing £2,000 a year, with an initial 2% charge to set up the product, additional annual 2% management fees and £150 in annual administration charges, would provide £11,000 less in income than a similar product with a single low charge of 0.75%.
That’s a significant loss for anyone who is relying on this income to make ends meet in later life.
Age UK’s 8-point plan
Despite the planned introduction of pensions guidance in April for those reaching pension age, Age UK is concerned that the reforms – the most radical changes to private pensions in a generation - do not include enough safeguards to help people understand the impact of their decisions and help them make the most of their savings.
For that reason, Age UK has launched an eight-point plan setting out action the Government and regulators need to take to give the public increased financial safeguards and confidence in the pensions industry.
These include the introduction of additional money management tools to help people avoid running out of money or overpaying tax unnecessarily if they withdraw their pensions too quickly.
Age UK calls for quality standards and regulation of charges for retirement income products likely to be introduced by the financial industry in the wake of the April’s reforms.
In addition, Age UK is also concerned that action is taken to prevent any surge in pension scams in the wake of the reforms. Pension liberation scams have already cost £495 million. A strong lead agency should be nominated to reduce the risks.
Caroline Abrahams, Charity Director of Age UK, said: ‘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. We believe, if implemented, our eight-point plan would give people the added security and reassurance they need to know that they are making the most of their hard earned savings.’