1.4 million older people could run out of pension cash

Press Association
'Family pressure' on pension pots
'Family pressure' on pension pots

As many as 1.4 million older people in England could face an inadequate retirement income after the new pension freedoms come into force, according to projections by a think-tank.

The International Longevity Centre-UK (ILC-UK) looked at what impact the choices made at the point of retirement today could mean for overall levels of retirement income over the next 30 years.

New rules coming into force from April 6 mean that people will no longer be required to buy a retirement annuity with their defined contribution (DC) pension pot. Instead, people aged 55 and over will be able to take their pension pot how they want, when they want to, either taking it all in one go or in a series of slices.

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The reforms have generally been welcomed, but concerns have also been raised that some people may blow their money and come to regret it.

The ILC-UK report, sponsored by Aviva, estimated that even if people who are at the point of retirement make decisions as they have in the past and annuitise, 1.1 million people with some defined contribution wealth in England will not be able to secure an adequate retirement income unless they receive additional pensioner benefits or use their non-pension assets.

It warned that the situation will be even worse if everyone was to use their DC pots on big ticket items that do not generate a retirement income. It said that in this instance, the numbers facing an inadequate income could rise to more than 1.4 million.

The findings in the report titled Here Today, Gone Tomorrow, used data from the English Longitudinal Study of Ageing.

The report said that given that people typically underestimate their life expectancy by upwards of four years, spending savings too early is a "real possibility".

It argued that annuities should continue to play a key role. Annuities give people a yearly income and provide them with a guarantee that they will not outlive their savings, but they have been controversial in recent years due to plunging rates.

Calculate your retirement income options

A system could be set up whereby people have part of their pension fund automatically turned into an annuity, it suggested. Consumers should be given a year's warning before this happens and it should not occur until that person reaches state pension age, it said.

Report author and ILC-UK senior research fellow Ben Franklin said: "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."

A Treasury spokesperson said: "The Government believes that people who have worked hard and saved all their lives should have the freedom to decide how to use their savings and the guidance to help them make good decisions.

"Our pension reforms give people that choice and are part of our long term economic plan to build a stronger, balanced economy where individuals can save and invest for their future.

"People will have access to a new guidance service that will be delivered to rigorous FCA standards, and empowers and educates people so they can make their own, informed choices and confidently engage with the pensions industry."

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