Pensions ‘timebomb’ warning as people could run out of money

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Britain is facing a pensions “timebomb” which could see many people running out of money in their old age, it has been claimed.

Around 37 per cent of UK residents over 75 have no private pension wealth, according to analysis by equity release adviser Bower Retirement Services.

Bower’s concerns are shared by Peter Heckingbottom, the investment director and deputy managing director at Leeds-based chartered financial planners Pearson Jones, who said: “We do expect smaller pension funds to be exhausted in early retirement leaving little or no funds for later retirement.

“It is indeed a ticking timebomb.”

According to Bower’s analysis of Government data, the median private pension wealth held by over-75s is £43,200, compared with £108,400 for retired people aged between 65 and 74.

The study found that average private pension wealth peaks at £135,900 in the run-up to retirement, when savers are aged between 55 and 64, but gradually declines in the early years of retirement, and then more rapidly as savers become older.

Bower warns that the launch of pension freedoms giving customers increased flexibility over how to spend their retirement funds could speed up this process.

Andrea Rozario, the chief corporate officer at Bower Retirement Services, said: “The fall in average private pension wealth once people pass the age of 75 really highlights the financial pressures of retirement and the risk of running out of money.

“Pension freedoms, quite rightly, mean increased flexibility with savers able to control their own money. But they run the risk of leaving themselves without enough money when they might need it for care or home adaptations.

“Property wealth can play a major role in helping people to fund retirement and can be accessed tax-free in a variety of ways including downsizing.”

Ms Rozario told The Yorkshire Post that she feared too many people were sticking their heads in the sand and underestimating how much money they will need in retirement, and how long they are going to live.

She added: “We have got an increasing demographic of older people who are going to be in need of more care. Children should be taught how to manage money at school.

“They need to have a good handle on how money works. Planning from an early age is a critical factor.”

Mr Heckingbottom said that affluent people are leaving their pensions undrawn, or drawing less money from them, so that there is more to pass on tax-free to their children.

Since April, retirees have been able to spend their pension pots as they choose, rather than being obliged to buy an income-bearing annuity.

Vanessa Eve, a portfolio manager at Sanlam Private Wealth, who is based in Harrogate, said that while the new pension freedoms can sound daunting, they do open up greater flexibility for individuals to create solutions which work for them in retirement based on their health and lifestyle, which may not have been so easily accommodated with annuities.

She added: “The diversity of scenarios that apply to retirement mean that as much as the industry would like to have a universal solution to offer retirees, this is unlikely to be possible across every individual’s circumstances. “

Sanlam Private Wealth commissioned a report written by Dr Paul Cox of the University of Birmingham, which argued that people should be encouraged to use their wealth more efficiently in retirement, rather than “segmenting” their pots for different purposes.

New freedoms are taking the UK into uncharted territory

Professor Robert Hudson, the professor of finance at Hull University Business School, said the new pension freedoms are taking the UK into uncharted territory.

He added: “Previously, most of the money had to be used to purchase an annuity which would provide a relatively small income for the rest of a person’s life.

“In one sense, the new freedoms are a test of how responsibly people will behave with their own money.

“People who spend their assets too quickly may create future financial difficulties for themselves.”

Those who failed to provide for their later years will create an economic burden on the state, which will probably have to support them, Professor Hudson said.

He added: “Hopefully, the new freedoms will be used responsibly, by most people but this is somewhat uncharted territory as this is an unprecedented policy change.”