Pension reforms could leave many pensioners penniless
Age UK warns that "significant numbers" of older people could run out of money as a result of pension reforms.
Age UK has warned that "significant numbers" of older people could run out of money as a result of the pension reforms which are being introduced this year.
It said it is concerned there are not enough safeguards to help pensioners understand how their withdrawals will affect their financial situation in the future.
Funds could quickly disappear
From April, new pension freedoms will be introduced, giving many pensioners unrestricted access to their pension funds, rather than being compelled to buy an annuity with them.
But Age UK is worried that pension funds could be quickly demolished. It carried out a study, looking at how a £29,000 pension pot - well above the typical pension savings - could shrink as a result of these changes. If a person withdrew £3,000 a year from the age of 65, and returns on the remaining savings were 3%, the pot would be exhausted by the time they were 75.
And if the withdrawals rose in accordance with the (estimated) rate of annual inflation, the pot would be gone by the time they were 74. Higher withdrawals within a year could also push up a person’s tax bill if their income creeps into higher marginal Income Tax bands, which would empty the fund faster.
Drawing £2,000 a year would make the money last longer, but only until age 81 (or 80 if withdrawals increased in line with inflation). And a reduced level of withdrawal raises questions about what quality of life a pensioner would experience, particularly if they require care in old age.
The average life expectancy at age 65 is currently 83 for men and just under 86 for women, meaning that the potential prospect of struggling financially near the end of our lives is a real concern.
While annuities have come under much criticism, they do at least pay an income for life.
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Understanding the consequences
The report also highlights the problem of high fees with drawdown products, warning that without the introduction of quality standards and charge caps savers could lose thousands in income.
Caroline Abrahams, charity director of Age UK, said that more flexibility in how we can use our pension savings was welcome. "But that makes it even more important that we fully understand the implications and consequences of our financial decisions and can trust the financial services in which we have invested," she added.
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