Better financial wellbeing support could protect future retirees
Since 2015, UK pension savers have had unfettered access to their pension pots. There are no longer any constraints on how much someone can take from their fund.
The latest FCA data suggests many people might be withdrawing excessive amounts that are likely to prove unsustainable long term. What’s more, they’re often doing so without advice.
The most popular withdrawal rate is 8% or more. Withdrawing at this level is unlikely to last a lifetime, but this figure should be treated with care. Government and industry data is imperfect. It is mostly displayed at the account or pot level and not through the eyes of the individual. The highest withdrawal rates are for smaller funds, which could be incidental to someone’s main retirement provision.
Taking too much out of the pot
Withdrawal rates are much lower, on average, for larger pots where the funds may be the bulk of a retirees pension pot. Even for these funds, the figures give rise for concern. For funds between £100k–249k around two-thirds are taking 4% or more. Of these, nearly one-third are taking 8% or more.
People with funds over £250,000 are withdrawing at lower rates, on average, but around one-third are still withdrawing 6% or more. Again, there may be legitimate reasons. They may have other assets or material health issues. That they have a significant defined contribution pot doesn’t mean that they don’t have decent defined benefits too.
Despite any gaps in the FCA data and the lack of a deeper insight into the personal circumstances of any individual, nevertheless, there seems to be cause for concern.
It’s not just a case of withdrawing too much: people are reaching retirement without adequate pension savings. The odds are already stacked against them. A 2019 World Economic Forum report calculates that UK retirees could outlast the pot of money they have saved for retirement by more than a decade.
What to do if the money runs out?
So what are the implications of retirees running out of money? In practice, it’s unlikely that money will run out abruptly. Most people will realise that their financial plans are going awry and take remedial action. They may ration their remaining savings to hold on to what they have for longer. They could buy an annuity to ensure they have an income of some sort for life. Equity in their home could be used to supplement a fall in income.
These actions have consequences. Reducing income will mean cutting spending, buying an annuity means less flexibility to deal with unexpected bills. Downsizing, or otherwise releasing home equity, could mean reducing the value of any legacy to be passed on.
What’s more, these actions aren’t guaranteed to restore spending power, rather they may mitigate the impact of a drop in income. At best, it may mean less travel and eating out, perhaps giving up the family car (or keeping it for longer). At worst, it could involve real financial hardship and difficult decisions to try and hold on to a decent lifestyle.
Evidence suggests spending falls over the course of retirement (long-term care aside). This may provide some consolation, but is unlikely to compensate fully for a drop in income.
The impact of retirees running out of money could also be felt within the wider economy. By 2031, one in five people will be aged over 65. It’s been estimated that pensioners spent £319bn in 2018, which accounts for 54% of all consumer spending, and which could increase to £550bn (63p of every pound) by 2040.
A reduction in spending could lead to a fall in demand in several sectors of the economy. Businesses that find demand for their products and services falling may be forced to lay-off staff, reduce investment in the business and face a cut in profits. Ultimately, deflationary pressures could lead to recession.
Warning of the dangers
Regulated financial advice is not a cure-all against people spending too freely during retirement, but it can warn people of the dangers and suggest alternative strategies and solutions.
Advice may seem expensive, but there are lower-cost digital solutions coming to market, including hybrid models that embrace the efficiencies of digitisation with a human touch deployed at key stages in the process.
Pension schemes could make access to advice more affordable for members. Many pension schemes already help members get advice. For others, this is the missing piece that could provide better retirement outcomes now and in the years to come.
Supplied by REBA Associate Member, HUB Financial Solutions
We are totally focussed on finding the right financial solutions for people approaching, or in, retirement. We don’t do anything else. Our purpose is to help people achieve a better later life.
