Millions of people risk running out of money in retirement as a result of pension freedoms according to new research.
An ongoing study undertaken by The People’s Pension and asset manager State Street Global Advisors has taken an in-depth look at the financial plans and spending habits of those approaching or in retirement.
This study found 74 per cent of the savers interviewed are spending pension savings at a level which means ‘at best’ they will run out of money in their mid to early 80s. It points out that many of this group can expect to live into their 90s.
It says pension freedoms have compelled people to put together their own retirement solutions, which in many cases are proving to be inadequate.
This study is based on in-depth analysis of a relatively small number of participants. However The People’s Pension said it showed there was demand for providers to offer ‘guided paths’ into retirement, rather than the complex array of decisions they now face. Their sample shows many millions could risk running out of money later in life.
The ‘New Choices, Big Decisions’ study reveals how policy makers and the industry have built a system that could only work effectively based on unrealistic assumptions as to how people behave.
The work by Ignition House maps out the massive discrepancy between expert assumptions and actual behaviour.
Key findings include:
- Savers are scared of planning for the future as they don’t want to discover the ‘truth’
- They underestimate the financial risk of growing old and don’t understand how inflation can impact their savings
- The typical saver follows the path of the least resistance – they won’t leave a product or change a drawdown withdrawal rate once they have signed up
Phil Brown, director of policy and external affairs at B&CE, the provider of the People’s Pension says: “This research shows why policy makers must require pension schemes to guide members to products which match retirement risks, including living longer than they had planned for, and which will ensure that DC pension savers have an income throughout their retirement.
“There is evidence that a significant number of people are sleepwalking into retirement and will have a worse quality of life in later years than could have been the case if they had been guided.
He says this report fills a significant gap in the understanding of how pension freedoms are working in practice.
State Street Global Advisors head of retirement strategy Alistair Byrne adds: “This research shows clearly the very many challenges that older savers face when making a decision about their pensions.
“People struggle to see beyond the near-term future and cannot always access the type of advice and support they would like. As an industry we need to continue simplifying what we offer, providing guidance and support, and easy paths to follow, whether we call them ‘defaults’ or not.”