Pension changes: Warning as millions could run out of cash

Sarah Coles
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The pension changes being introduced in April could mean millions of people use up all their pension savings by the age of 75. This stark warning has come from Age UK, which warns that the new rules don't have the necessary safeguards to stop people overspending, and burning through their pension in the first ten years.

The new rules allow people to withdraw as much money as they like from their pension savings, whenever they like, as long as they pay the necessary tax on it. And while the rules are being hailed as offering vital flexibility for many, they could spell trouble for millions.

The charity worked on the basis of a £29,000 pension pot - which they said is far more than a typical pot at the moment. If people took £3,000 a year from the age of 65, and the return they were getting on the rest of their savings averaged 3%, then they'd run out of cash completely by the age of 75. If they increased their annual withdrawals in line with inflation, they'd run out of money at the age of 74.

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Given that the average man retiring now at the age of 65 can expect to live to the age of 83, and the average woman to the age of 86, this leaves pensioners spending the last ten years of their lives without any income at all from their private pension. For many, this will bring a financial crisis.
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Time to act

Age UK is calling on the government to bring in new money management tools - which they have termed 'jam jars', to help people plan more effectively, and understand what they can afford to take from their pension. They also want to see a pensions 'dashboard', which would bring together data from all their pension schemes - including the state pension - to make it easy for them to appreciate the bigger picture.

They welcome the free guidance which will be available through Citizens Advise and the Pensions Advisory Service, but would like to see the government go further in supporting pensioners.

Charges

Age UK also raised concerns over the lack of quality standards and charge caps for income drawdown products - which could cost people thousands of pounds in potential income.

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They used the example of someone with a £29,000 pension pot, with their money in a high charging drawdown product - charging 2% to set the product up, 2% in annual management fees, and £150 in annual administration fees. If they took £2,000 a year from the product, they'd end up with £11,000 less income than someone in a product charging a single flat fee of 0.75%

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."

She added: "This is too important to leave to chance."

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