Age UK calls for safeguards on pension reform
Published on 10 January 2015 12:01 AM
Significant numbers of older people could run out of money in the wake of new pension reforms, says new Age UK study
New analysis for Age UK reveals that the reforms coming into effect in April which will allow people to withdraw money from their pension savings could lead to significant numbers of older people running out of money, unless stronger safeguards are put in place.
Calculations in Age UK's new report, Dashboards and Jam Jars [i], were based on a £29,000 pension pot [ii] - well above typical pension savings. They revealed that if people withdrew £3,000 a year (non-index linked) from the age of 65, and returns on the remaining savings were 3 per cent, their savings would run out when they were 75. If the annual withdrawal increases by an estimated annual rate of inflation [iii], people would run out of money when they were 74.
Drawing less each year (£2,000) would mean the money would last longer, but only until age 81 (or 80 if withdrawals increased annually). Even if returns on remaining savings are higher, at 5 per cent, people withdrawing £3,000 a year would still have run through their savings when they were 76 (or 75 with increasing withdrawals.)
With average life expectancy at age 65 currently just over 83 for men and just under 86 for women [iv], even modest annual withdrawals mean a significant number of pensioners risk having to survive for several years at the end of their lives without any income from their private pensions. For many this will mean life will become financially much tougher with some struggling to make ends meet.
Age UK's report also reveals that unless quality standards and charge caps are introduced on income drawdown products, people who invest their pension pots are at risk of losing thousands of pounds of potential income.
For instance, the report calculates that a £29,000 pension pot invested in a high charging drawdown product, drawing £2,000 a year, with an initial 2 per cent charge to set up the product, additional annual 2 percent management fees and £150 in annual administration charges [v], would provide £11,000 less in income than a similar product with a single low charge of 0.75 per cent. That's a significant loss for anyone who is relying on this income to make ends meet in later life.
Despite the planned introduction of pensions guidance in April for those reaching pension age, Age UK is concerned that the new pension reforms - the most radical changes to private pensions in a generation - do not include enough safeguards to help people understand the impact of their decisions about their pension pots and to help them make the most of their savings.
For that reason Age UK has launched an eight point plan setting out action the Government and regulators need to take to give the public increased financial safeguards and confidence in the pensions industry.
These include the introduction of additional money management tools to help people avoid running out of money or overpaying tax unnecessarily if pensions are withdrawn too quickly.
Age UK is also calling for the introduction of quality standards and regulation of charges for retirement income products likely to be introduced by the financial industry in the wake of the April's reforms.
In addition, Age UK is concerned that action is taken to prevent any surge in pension scams in the wake of the reforms. Pension liberation scams have already cost £495 million [vi]. Age UK is calling for a strong lead agency to be nominated to reduce the risks.
Caroline Abrahams, Charity Director of Age UK said, 'We welcome people having more flexibility in how to use their pension savings. But that makes it 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.
'That's why we believe that there must be additional checks and balances introduced to the pensions legislation in addition to the impartial guidance that will be available.
'This is too important to leave to chance. We believe, if implemented, our eight point plan would give people the added security and reassurance they need to know that they are making the most of their hard earned savings.'
For more information on age UK's eight point plan please contact the press office.
Download Dashboards and jam-jars (PDF 2 MB)
Notes to editors
Media contact: Mallary Gelb
Tel: 0203 033 1682
Out of hours: 07071 243 243
- Dashboards and Jam Jars - an independent report for Age UK by Dominic Lindley
- The ABI says average (mean) annuity in 2013 was bought with a pension fund of around £35,600; but the median was around £20,000, so half of people buy an annuity with less than this.
- Inflation estimated to be 2.75 per year.
- A lifetime's savings lost in a moment, The Pensions Regulator press release, 24 July 2014
We work with our national partners, Age Scotland, Age Cymru and Age NI and our local Age UK partners in England (together the Age UK Family). We also work internationally for people in later life as a member of the DEC and with our sister charity Help Age International.
Age UK believes that everyone should have the opportunity to make the most of later life, whatever their circumstances. We provide free information, advice and support to over six million people; commercial products and services to over one million customers; and research and campaign on the issues that matter to people in later life. Our work focuses on five key areas: money matters, health and well being, home and care, work and training and leisure and lifestyle.
Age UK is a charitable company limited by guarantee and registered in England (registered charity number 1128267 and company number 6825798). Age Concern England and Help the Aged (both registered charities), and their trading and other associated companies merged on the 1st April 2009. Together they have formed the Age UK Group ("we"). Charitable services are offered through Age UK and commercial products are offered by the Charity's trading companies, which donate their net profits to Age UK (the Charity).