Pension Freedoms: Ignorance isn’t bliss

16th January 2018
Pension Freedoms: Ignorance isn’t bliss

“Real knowledge is to know the extent of one’s ignorance.”

Attributed to Chinese philosopher Confucius, this timeless phrase has never been more apt than when applied to the topic of Pension Freedoms.

A new report, from Old Mutual Wealth has revealed that many 50-60-year olds are uninformed about Pension Freedoms, with:

  • 45% not knowing about Pension Freedoms at all, or not knowing how the new rules affect them
  • 37% not knowing how or when they should access Pension Freedoms

Why is knowledge important?

Pension Freedoms are perhaps the biggest revolution to take place in the retirement arena in the past 20 years. Used well, the reform means that you can retire early, in a way which is more flexible and suits your lifestyle.

That freedom has given many people more control over their finances. It means that you can take lump sums from your pension pot for big purchases, or to help loved ones financially, as well as planning ahead to leave larger legacies to your loved ones.

However, the new-found freedoms come with potential dangers and pitfalls. For example, withdrawing too much, too soon could leave you facing financial difficulties later in life.

Current concerns

Research from AJ Bell has shown that some pensioners may run out of money within 12 years, due to three factors:

  • Withdrawing too much each year
  • Underestimating how long they will live
  • Spending money frivolously

44% of over-50s choose to withdraw over 10%, a figure usually considered to be unsustainable, of their pension savings annually. Worryingly, the biggest group of people doing so (57%) are aged 55 to 59. As well as over-withdrawing, more people are taking money without planning for the future, as:

  • 47% take ad-hoc lump sums
  • 35% rely on an income of regular withdrawals

In addition, the same age group (55-59) severely underestimate how long their pension will need to last, with:

  • 51% estimating that their pension will need to last for 20 years or less
  • 24% believing that they will need to make their pension last for less than 10 years

The combination of large withdrawals and a lack of planning for the future means that many people are at risk of running out of money part way through their retirement. According to the Office for National Statistics (ONS), the life expectancy for someone who is currently 55 is:

  • 81 for men
  • 85 for women

That means that pensions may need to last for more than 25 years for both sexes.

Another concern is the reasons behind the withdrawals. Whilst Pension Freedoms means that you can access the whole pension fund for any reason; it doesn’t necessarily mean that you should.

AJ Bell’s research shows that 40% of 55-59-year olds make withdrawals for day-to-day living costs (a pension’s intended purpose). Meanwhile, a quarter (25%) have used Pension Freedoms to make luxury purchases, including holidays and cars.

Using your pension wisely

Pension Freedoms are in place to give you more control over the way you use your pension savings. However, it has never been more important to plan ahead and make sure that you are using them in a way which benefits you both now and in the future.

It might be tempting to withdraw large amounts and go on a spending spree; but that could potentially leave you exposed to financial danger for the rest of your life.

So, how can you use the Pension Freedoms reform to meet your needs?

There are four key points to remember:

Have an open mind: Old Mutual’s research revealed concerns that consumers may be choosing the “path of least resistance” by accepting the drawdown option offered by their pension provider without shopping around. It can be all too easy to stick to what you know and reject any new options out of comfort. But a little research could go a long way toward making the most of your pension savings.

Avoid the threats: Unfortunately, the new rules have inspired a range of new scams and fraud attempts. Stay vigilant and never accept an unsolicited offer. Always verify companies through the Financial Conduct Authority (FCA). Secondly, remember that your pension pot may have to last for 20, 30 or 40 years. Spending too much, too soon could cause you financial difficulty in the future.

Take advantage of the opportunities: taking advantage of pension freedoms could help you retire early, or more flexibly, in a way which suits your preferred lifestyle. It can also help you leave a legacy to younger generations.

Seek advice: Research from Unbiased has shown that people who take financial advice save an average of £98 more each month, which leads to an additional £3,654 in annual retirement income.

For more information on Pension Freedoms and how your retirement could be affected, feel free to contact us.