Lamborghini moment may drive many into poverty

THE OVER-55S have embraced pension freedom reforms allowing them to draw cash from their pots with such enthusiasm that some experts now fear many risk running out of money in retirement.

When the coalition government introduced pension freedom reforms in April 2015, then Pensions Minister Stevewebb said well-off retirees would be free to blow their pot on a Lamborghini if they wished, in a comment many thought encouraged recklessness.

While scrapping the obligation to buy an annuity and putting people in control of their own money has been hugely popular, there are dangers.

If people draw too much pension too quickly, they could deplete their pot years before they die, and end up falling back on the state for support.

A rise in withdrawal rates suggests this may happen, so could pension freedoms trap many in poverty?

GROWING RISK

More of us leave our pensions invested after we stop working and take lump sums or income as needed, a process known as drawdown.

Worryingly, new research suggests that many are drawing down funds at unsustainable rates, particularly those who manage their own money rather than taking independent financial advice.

Almost one in five non-advised savers have fully depleted their fund, just over four years after the reforms came into force, according to the latest Moneyfacts UK Personal Pension Trends Treasury Report.

They are emptying pots at three times the speed of those who have taken advice, which suggests they are being more cavalier with their money.

Moneyfacts head of pensions Richard Eagling said drawdown offers flexibility but also means people have to take on “longevity risk”, and could run out of money if they live longer than expected. “The fact that those going it alone without advice are almost three times more likely to deplete their fund should be a red flag moment.”

The Financial Conduct Authority (FCA) has even more alarming figures showing 40 per cent of all savers are drawing at least 8 per cent of their pension as income each year, up from 27 per cent in 2016/17.

This is double the “safe withdrawal rate” of 4 per cent a year, which experts say is the maximum you can take without running down capital.

Eagling agreed the figures are alarming although slightly inconclusive, as they “do not show if savers have other pension plans or sources of income to fall back on.”

EMPTY POT

Stephen Lowe, director at specialist retirement group Just, said that almost two thirds of those emptying larger pots worth between £100,000 and £250,000 do so without taking advice: “The sheer number of non-advised sales is causing grave concern that people are not choosing wisely.”

Jon Greer, head of retirement policy at wealth advisers Quilter, said that as well as the danger of depleting pension pots too quickly, many could also face a shock tax bill.

Pension withdrawals are added to your total earnings for that year, then subject to income tax at your marginal rate. “If you take a lump sum in a single tax year it may result in a heftier income tax bill than if you took the money gradually,” he said.

Greer warned that rapid pension withdrawals rarely make financial sense: “People risk ruin if they outlive their savings.”

Tom Selby, senior analyst at AJ

Bell, said the hope is that people who are depleting smaller pension funds still have larger pots to fall back on: “Pension freedoms were always going to be risky. Some will use their flexibility responsibly, others risk sleepwalking into disaster.”

FAST WORK

So what does the man who made the Lamborghini comment think? Steve Webb is now director of policy at mutual insurer

Royal London.

Pensioners have not been rushing to buy Lamborghinis, which is hardly surprising given prices start from £155,000, and Webb said the high tax bill on large withdrawals is a deterrent to splurging your pot.

If anything, many who have not taken financial advice are being too cautious rather than too flashy, he added. “They are putting pension wealth into products such as cash Isas, which offer a very poor return.”

The best instant access cash Isa pays around 1.5 per cent, well below inflation at 2.7 per cent, which means their savings are falling in real terms.

Webb said many empty smaller pension funds but leave larger pots to grow, and stood by the decision to waive the annuity obligation: “Until 2015, many were forced to use their pension to buy poor value annuities.”

Annuities are still available if you want one. “However, people now have much more flexibility and rightly so.”

Although some are reckless, most use their lifetime savings sensibly. Webb added: “We need to ensure that people get advice and guidance, but there is no absolutely no case for reversing pension freedoms.”

Those who do not want to pay an adviser should at least contact the free Government-funded Pension Wise service. Sadly, it probably will not suggest you buy a Lamborghini.

‘Those who do not take advice are emptying their pension pots at three times the speed’