PERSONAL ACCOUNT

The biggest danger is that savers will, in error, kill off their golden goose

There was always a risk that “pension freedoms” – the dramatic reforms that allow savers aged over 55 to access and spend their life savings as they wished – would result in some tragic cases of people wasting everything in a few crazy months.

But in fact after more than two years of the freedoms being in force these extreme instances seem so far rare (see Page 3).

I think there’s another, bigger danger relating to pension freedoms, the true extent of which we will not be able to judge for some years. This concerns the problems that retired people are likely to face in managing their pension pot in such a way that it provides the maximum income for as long as needed.

Until more people enter retirement under this new regime and confront this problem it is likely to be underestimated. At the moment, the cohort of older workers moving into retirement include many who still benefit from income paid to them by oldfashioned “final salary” or “defined benefit” type work pensions. They enjoy a solid base of income from these increasingly rare plans and from their state pension. Soon, though, we will have generations at the start of what they hope to be a long and prosperous retirement with only the state pension as actual income. The rest of their savings will be in the form of a lump sum, the proceeds of a “defined contribution” pension pot. This is the default form of private sector work pension today.

Say that at the age of 68 you had a pension pot worth £100,000. What next?

The obvious answer, of course, is to invest it. But what in? So you overcome that hurdle by investing it in a basket of shares that resembles the UK stock market, as measured by the FTSE All Share index. Next question: how much income can you safely take each year?

Even if we were not living through an astonishing, unprecedented era of low yields, the balancing act of taking income while preserving enough g capital is hugely difficult. There here are some rule-of-thumb answers, rs, but none on its own closes off all l dangers. One solution is to take only the “natural yield” – which in this his case means just the dividends. The he capital, in the form of the actual number mber of shares you own, remains intact. tact. This really is maintaining the he golden goose in its purest form. But with the natural yield of the FTSE generally varying between 3pc and 4pc, pc, most savers will need to withdraw w some

‘Savers have turned their backs on secure income’

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