David Kingman reports on some worrying evidence which suggests that many retirees may use their new freedom to access their pension savings irresponsibly
A significant share of retirees may be planning to use their pension savings irresponsibly, according to the findings of a new survey. The report – from personal pension provider Liberty Sipp – found that 20% of British pension-holders are planning to use their money to buy a new car once pension rules are relaxed next April.
This finding should raise new concerns about the potential burden the state may have to absorb if large numbers of older people exhaust their pension savings and find they lack sufficient incomes to live on.
Lamborghinis for all?
The survey asked 600 pension savers who are close to retirement age what they plan to do with the money saved in their pension funds once the new rules that were announced in the Chancellor’s 2014 Budget speech come into force next April.
These new rules will have a big impact on pension saving: for the first time, savers will not face a tax penalty if they withdraw all of the money they have saved in their pension fund. They will still have the same degree of choice that they do under the existing system about whether they purchase an annuity or not, but they will also have greater flexibility to keep some of their money invested and take an income through investment “drawdown” instead.
Pensioners Minister Steve Webb has already stoked concerns that some people may be tempted to withdraw all the money they have saved and spend it recklessly on short-term consumption, rather than using it to provide them an income that will support them throughout retirement. Following the announcement of the new rules, he infamously remarked that it was “their choice” to “get a Lamborghini and end up on the state pension,” a comment which attracted stinging criticism.
The new survey from Liberty SIPP suggests that a significant proportion of savers may be planning to take him at his word. Alongside the 20% of respondents who said they were planning to buy a new car, another 12% said they would spend the money on a holiday. A further 10% indicated that they would prefer to spend the money on either paying off their mortgage or settling other debts, and overall only 58% said they were going to keep the money invested in a pension scheme. Just 7% said that they would purchase an annuity, reflecting concerns that the annuity market could suffer now that people have a broader range of options.
These findings were remarkably alike those found by a different study from Challenger Retirement Income Research which looked at the plans of pension savers in Australia, where a very similar system is already in place. The biggest difference there was that only 21% of savers said they planned to keep the money invested in a pension fund, with much larger proportions saying they planned to look at alternative investment strategies or investing in property.
The Managing Director of Liberty SIPP, John Fox, said the following:
“Next year’s changes to the rules on pensions are nothing short of revolutionary and will give retirees more freedom than ever before. But our research shows that many will use that freedom to treat themselves. The lure of a new car or a nice holiday has proved irresistible for many Australians; now a similar proportion of Brits are set to succumb to the same temptation when they retire. On this evidence, Britain’s car dealers may be expecting a bumper 2015.”
Beware moral hazard?
If large numbers of savers do use their pensions to enjoy short-term consumption, that could pass a greater burden on to the welfare state in the form of means-tested benefits later on. This is the classic problem of “moral hazard” – the situation in which people are more inclined to take risks than they would be otherwise because they don’t expect to suffer negative consequences from doing so.
The Institute for Fiscal Studies has produced research that highlights a number of specific problems with moral hazard in this instance: it is likely to increase the bill for means-tested council tax benefit and housing benefit in the future, and the absence of compulsory annuitisation could lead to a decline in the profitability of annuity-providers and, ultimately, customer choice. Given that these reforms are supposed to be all about giving pensioners greater choice, it would certainly be ironic if they ended up having the opposite effect.