Ricky Chan, IFA at London-based wealth management firm IFS Wealth & Pensions, posits that in spite of higher levels of engagement with pensions, the freedoms have a lot to answer for where reducing the sustainability of clients’ retirement income is concerned.
Mr Chan says: “I think humans have a bias towards [instant] gratification. If they can get something now rather than 10 or 20 years down the line, they’ll take it. A lot of the time, people want to enjoy what they can now, but they’re not sure how long they’ll live. So what you’ll find is that in the initial stages they’ll probably withdraw a lot more, and then they may decide to be a little bit more cautious in terms of how they control their retirement income.
“But when that initial chunk of money comes out of their pension pots, it’s not in reverse of that compound interest. The money they’ve taken out will not come back in growth over the years, so it may have a big impact on their welfare later on in life.”
The evidence suggests that those taking lump sums do not have much focus on longevity. The average amount taken is in the region of £14,000, according to the Association of British Insurers, but a lack of data on exactly why retirees are taking these decisions makes it hard to draw conclusions. There is little sense on whether these sums are partial withdrawals or whether they represent entire pension pots. Industry calls for more information on this front have been a recurring theme since the introduction of the freedoms.
How much is enough?
Les Cameron, head of technical at Prudential, says the majority of savers who are asked about their desired retirement income “generally underestimate” what they need.
Mr Cameron says: “I think it’s probably worth actually sitting down and [going] through everything you’re going to, and are likely to, spend when you’re retired and then have a look at how much you think a pension is going to provide.
“That’s an exercise which should be done and usually wakes you up to the fact that you’re probably not saving enough, or you’ve got an unrealistic expectation about the amount of income you can draw from the savings you’ve got.”
But Jody Sturman, financial adviser at MoneySprite, says his clients, many of whom are “working class and have funds between £50,000 and £400,000” are “more concerned with ensuring their unused pension funds are available to their estate on death rather than the income security of an annuity.”
