New analysis from Age UK has warned of “significant numbers of people running out of money” in retirement. So could the free online retirement planner from RetireEasy.co.uk help many avoid falling into that trap? By Tony Watts OBE, Director of RetireEasy.co.uk.
Research from Age UK (published 10 January) reveals that the long awaited pension reforms coming into effect in April might have the unintended effect of what they describe as “significant numbers of older people running out of money”.
The reforms have been broadly welcomed by all sides – and quite rightly. The flexibility they offer could – handled wisely – enable those heading into retirement get far more income from their hard-earned pension pots.
Media reporting of Steve Webb’s now famous “Lamborghini” comment missed his main point that you would have to be very foolish indeed to take out so much of your fund that you incurred punitive rates of tax. However the new flexibility does pose some risks – for one thing, because it can be difficult to work out just how long your funds will last, especially if you go for a “drawdown” option.
And for another, the charges being made by some providers could potentially eat up a large chunk of what you might be expecting to receive.
Annuities may have had their faults, but you did at least know what you could expect to receive for the rest of your life, and it was fairly straightforward to cross compare different products.
So just how much might that be? Calculations in Age UK’s new report “Dashboards and Jam Jars” were based on a £29,000 pension pot. As small as that sounds, that’s actually well above a typical pension pot. Their figures show that if someone withdrew £3,000 a year (non-index linked) from the age of 65, and returns on the remaining savings were a relatively standard three per cent, their savings would run out when they were 75.
If the annual withdrawal increases by an estimated annual rate of inflation, people would run out of money when they were 74. Bearing in mind that large numbers of us go on to live for at least 10 years after that and the ramifications are obvious.
Age UK have rightly called for “stronger safeguards” to be put in place, saying that “unless quality standards and charge caps are introduced on income drawdown products, people who invest their pension pots are at risk of losing thousands of pounds of potential income”.
One major problem, they point out, is the high management charge that some products impose, which eats up returns and have called for a series of changes – including “the introduction of quality standards and regulation of charges”. They also call for “the introduction of additional money management tools to help people avoid running out of money”.
One already exists that is absolutely free to use, has won plaudits from Investors Chronicle and ThisIsMoney, and is readily available to anyone who has online access (directly or through a trusted friend or relative). www.retireeasy.co.uk allows users to feed in all their expected outgoings and incomes in the years ahead and then automatically calculates whether (or when) they will need to cut back on their spending.
Equally, the programme allows users to try out different scenarios – such as downsizing, helping out a family member or receiving an inheritance – to see how that would affect future plans.
And for the purposes of anyone planning where and how to use their pension pot, this feature enables them to see exactly which product might suit them the best… and if they are in a position to take any of the cash out of that pot.
No, it can’t make the size of their pension pot bigger… but it can make it go further. And at the very least it will demonstrate the folly of buying a Lamborghini!
