Updated 23 January 2017
Research for Channel 4’s Dispatches suggests that the government has seriously underestimated how people will use their new pension freedoms. Big dangers face an ageing population that may have lots of ready cash, but less awareness of where to find impartial advice.
‘We’re talking about trusting people with their own money,’ said George Osborne, when he announced his pension reforms. It’s hard to argue with that. But it’s also naïve to presume that people will automatically know how to cope with these unprecedented freedoms. Pension Wise, the free guidance guarantee, is starting to look inadequate even before its launch, amid signs that the public’s response will be far more dramatic than anticipated.
Chris Noon, from actuaries Hymans Robertson, told Channel 4’s Dispatches programme that he expected an increase of around £6bn in withdrawals from pension schemes, about three times more than the government’s own estimates. The research indicates that almost half of those aged 55 or over intend to take some or all of their money as a lump sum, rather than buy an annuity. Additionally, some people with final salary schemes (which work rather like an annuity) are also expected to transfer out in order to get their hands on a lump sum.
Osborne has stated that he does not believe pensioners will rush out and buy Lamborghinis. That said, a tidal wave of spending from the older generation might deliver a short-term boost to the economy – and it would be remarkable if this thought hadn’t occurred to him. But it’s not in anyone’s long-term interests for people to spend all their retirement savings long before they die, and according to Age UK there is a real risk of this happening.
The charity has warned that, under the new rules, some pensioners could use up their entire pension pot in as little as ten years. Age UK’s director, Caroline Abrahams, has welcomed the increased pension freedoms and flexibility, but sounds a strong note of caution: ‘[It is] 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.’
The biggest decision of your life?
Nor is overspending the only big risk. Where there is ready money, there is usually someone ready to relieve you of it. The dash for cash will result in a huge number of ageing, increasingly vulnerable people who may have access to large sums of money, and who are uncertain about what to do with it. The need for advice among this demographic has never been greater, and many pensioners may fall prey to fraudsters promising get-rich-quick schemes, or even to well-meaning but ill-informed friends. We can hope that the Pension Wise service will point people in the right direction, but it cannot itself provide the necessary level of advice.
Quoted on the Channel 4 programme was Saga’s chief executive Lance Batchelor. He said, ‘It is great that the government has recognised that people… can be trusted to make decisions [about] their retirement savings.’ However he also warned, ‘Getting the right unbiased advice or guidance about how much to spend, and how to invest for future needs, will be crucial.’
Let’s be clear: the new freedoms are a good thing. People should be trusted with their own money. But they should also remember that they have never faced this situation in their lives before: being handed a lump sum on which they must now live for an unknown number of years to come. How can a person in those circumstances be expected to make the right decisions? Of course, there is only one answer. We can’t all be trusted to be financial experts – but hopefully we can be trusted to pick up the phone and call one.
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