Warning: pension freedoms are dangerous

Sarah Coles
Pension freedom risks
Pension freedom risks

Pension freedoms have made the world a far more dangerous place for retirees, according to the OECD - and increased the risk that people will outlive their savings.

It announced that it had two major concerns. The first is that the advent of pensions freedoms - and the end of the requirement to buy an annuity - have damaged the annuities market. Providers have started pulling out, which means it's getting harder for people to get a competitive deal.

The second worry is that pensioners will underestimate the cost of living, and their own longevity, so they will run out of money in retirement.

Steven Cameron, pensions director at Aegon agrees this is a risk, and has warned: "In the world of pension freedoms, the risk of outliving pension savings is a very real threat to the UK's future retirees."

See also: The real reason we don't save for retirement

See also: Most of us think living longer is a disaster: is it?

The risk

In the past, when you pretty much had to use your pension pot to buy an annuity, savers were forced into products that many felt did not offer the value they were expecting. However, by exchanging a lump sum for an income for life, they were at least ensuring that they wouldn't outlive their pension pot.

Now, the majority of pensioners are not opting for an annuity. As Peter Bradshaw, national accounts director at Selectapension, puts it: "Drawdown has overtaken annuities as the new status quo in the world of pension flexibility."

The fact that people are able to take whatever they want from their pension - whenever they want it - raises the risk that people miscalculate either their lifespan or their needs, and run out of money.

The solution?

While annuity rates are so low, there will be plenty of people who don't want to tie up all their cash in one. However, much of the industry is agreed that the right solution for a lot of people will be a combination of approaches that will provide some guaranteed income for life, but still offer some additional flexibility.

Andrew Tully, pensions technical director, of Retirement Advantage suggests that a 'mix and match' approach might offer that balance (an approach the OECD suggested people should be encouraged to consider). He says: "People like the certainty of knowing the essential bills are paid, come what may. So it makes sense to use an annuity to provide this security, as no other product can provide a guaranteed lifetime income. But people can get the best of both worlds by banking the bills using an annuity and investing any remaining funds in drawdown which provides the flexibility."

The market as also developed a relatively new alternative. Cameron says: "In response to a clear demand from customers for both flexibility and security, there are now flexible 'drawdown' products available which offer the option to select a guaranteed minimum income for life. These products provide the flexibility which have made the freedoms so popular while giving individuals comfort that however long they live, they won't run out of money."

However, none of these products or approaches will suit everyone and their circumstances. It means that i's essential that retirees understand all the available options in order to find the one that's right for them. It's why the OECD also suggested that we should get professional advice on retirement - to ensure we make the right decision.

Of course, financial advisers will charge you for their expertise, but it might just be a price worth paying if it stops you making a dangerous mistake.