Concerns over savers blowing their pensions on luxuries

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Concerns are mounting over the number of people in their mid-fifties who have used new pension freedoms to fork out for luxuries. In the first few weeks of pension freedoms, Scottish Widows said that 70% of people getting in touch wanted to withdraw their entire pension pot.

In total so far, the Daily Mail reports that people in their late 50s have taken up to £2 billion from their pension pots, and millions have been spent on home improvements, holidays, fancy cars and speedboats.

Actuaries at Hymans Robertson estimate that £5 billion will be taken out of pensions in the first three months of pension freedom. They said that £3 billion would be spent on luxuries such as new kitchens, conservatories and cars.

Among those withdrawing and spending their cash will doubtless be many people who can ill-afford to do so, who will end up needing to rely on the state later in their retirement because of profligate spending in the early years.

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Don't panic
However, there are three very good reasons why these figures may not be anything to worry about. The first is that just because people are encashing their pensions, it doesn't mean they are blowing their money. A survey for the National Association of Pension Funds found that 67% of people withdrawing the cash from their pension intended to invest it and spend it gradually during their retirement.

Second, there are signs that the pensions being cashed in weren't people's main retirement pot. Scottish Widows says 85% of requests for encashment were for pots worth £30,000 or under, and Hargreaves Lansdown says the average is £12,000.

There's a real possibility, therefore, that we're seeing people use their pensions very sensibly. If, for example, they have a workplace pension that isn't offering the new freedoms, plus a separate smaller personal pension, they may use the personal pension for a lump sum and use their main workplace pension to produce an income.

Finally, Scottish Widows said that over the weeks, the balance of calls it received had changed, so that by the end of May, around 50% of calls were regarding full encashment. It said: "Over the last few weeks, interest in exploring other retirement income options has increased significantly and for the first time these request have now over-taken the volume of customers simply looking to cash in their pension."

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Scott Mullen director at My Pension Expert argues: "We're yet to see the flood of retirees stripping out their pensions that some predicted would be the case once the pension freedoms came into effect. In my opinion I don't believe that it will ever come, as the majority of customers that we've dealt with so far have been turned off the idea once they've been aware of the tax and longevity implications."

He adds: "A large proportion of the customers that we deal with on daily basis have saved responsibly for the majority of their working lives, so the idea that they would suddenly become reckless with their retirement funds is misplaced in my experience."

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Concerns over savers blowing their pensions on luxuries

Pension experts at Mercer have identified the countries with the best pension systems. At number 10 is Singapore.

The system is based on the Central Provident Fund, which covers everyone in a job. Some of the cash can be withdrawn during your working life, and a prescribed minimum drawn down at retirement as an income.

Overall, Singapore scored 65.9 out of 100. It fared well on sustainability measures, and integrity, but relatively low incomes in retirement dragged its combined score down.

The UK scored 67.6 out of 100. The system was ruled to have great integrity, and good incomes in retirement. The overall scores were also up from the year earlier, as auto-enrolment was rolled out further, bringing more people into workplace schemes.

The researchers, however, were worried about how sustainable the system would be in the future. They called for an increase in minimum pensions, and added that more people ought to be encouraged into workplace schemes and persuaded to contribute more to their pension. They also wanted to see more people saving privately for their pension, and working later in life.

In Chile the state offers means-tested assistance, a mandatory centralised pension for employees to contribute to, and there are voluntary employer schemes.

Chile score 68.2 out of 100. Its highest score was for integrity, with another good mark for sustainability. Relatively low incomes in retirement let it down, and the researchers said the biggest improvements would come from raising the contribution levels.

Canada has a universal flat-rate pension - with a means-tested supplement. There’s an earnings-related pension based on lifetime earnings, plus voluntary workplace and private schemes.

It scored 69.1 out of 100. Its best score was for incomes in retirement, while it also performed well for integrity. Its only relative weak point was how sustainable it might be for the future - particularly because older people don't tend to stay in work.

Sweden has an earnings-related system with notional accounts - although this system was introduced in 1999 so it’s still in transition from a pay-as-you go system to a funded one. There’s also a means-tested top up.

Sweden was given 73.4 out of 100. It scored excellently for integrity, and well for sustainability. The overall score was brought down by incomes in retirement, and the researchers called for more workplace and private pensions.

Switzerland has an earnings-related public pension, a mandatory occupational system and voluntary private pensions.

It scored 73.9 out of 100. It fared well for integrity and reasonably well for incomes in retirement. The researchers just questioned its sustainability.

Finland has a means-tested basic state pension and a range of statutory earnings-related schemes. It scored 74.3 out of 100.

It had high integrity scores, with a less positive result for incomes in retirement, and a surprisingly low score for sustainability. The researchers called for higher minimum pensions, higher mandatory contributions and encouraging people to work longer to improve sustainability.

The Netherlands has a flat-rate public pension and quasi-mandatory earnings-related occupational schemes - which are industry-wide defined benefit schemes based on lifetime average earnings.

The system scored 79.2 out of 100. All its scores were high - particularly for the integrity of the system.

The system in Australia consists of a government scheme, a mandatory employer contribution into a pension, and additional voluntary contributions from individuals.

It benefits from the fact that all workers have been automatically enrolled in their company pension schemes for some time, so participation rates are high. The minimum contributions have also been raised recently, which means workers are building reasonable retirement incomes. It had an overall score of 79.9 out of 100, with the only question mark being over sustainability.

Denmark’s system includes a basic state pension, means-tested state top-ups, a fully funded defined contribution scheme and mandatory occupational schemes.

The researchers said it was "A first class and robust retirement income system". It scored 82.4 out of 100, with high marks across the board.


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