Older Brits are spending their pension savings too fast to make them last (Image: Getty)
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Almost three pensioners in four are spending their retirement savings at a rate that will see them run out long before they die, a new report has found.
And the speed of spending means people will spend a full third of their retirement with the state pension and nothing else to support them, despite putting money away to look after themselves in their later years, the research from workplace pension provider The People's Pension and asset manager State Street Global Advisors found.
The study looked at retirement planning and spending habits over the six years since the introduction of pension freedoms in 2015, which give over-55s the ability to spend their savings however they wished.
Some 74% of people were found to be spending their pension savings at a rate that could leave some running out of money in their mid-80s, even though they may live for longer.
Researchers found savers tend to under-estimate the financial risks of growing old and follow the path of least resistance – meaning they will not switch pension products once they have signed up.
People are underestimating how long they'll live
(Image: Getty Images/iStockphoto)
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The report said: "Pension freedoms have reframed pensions from being an 'income for life' to 'money for retirement'. Members now fundamentally see their DC (defined contribution) pots as just another form of savings."
It said there is also an "ostrich effect" whereby people tend not to be inclined to contemplate their later years and think they will be OK if their savings run out.
Phil Brown, director of policy and external affairs at B&CE, the provider of The People's Pension said: "There is evidence that a significant number of people are sleepwalking into retirement and will have a worse quality of life in later years than could have been the case if they had been guided.
"People would be dismayed to arrive at a car dealer's forecourt to buy a car, be presented with a selection of parts and told to a pick a selection and build their own vehicle, so why do we expect pension customers to do exactly this?"
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But, starting next month, there is a new plan designed to help people make better decisions.
Investment pathways ask people their plans for the next five years – then offer options that will match that vision.
Steven Cameron, pensions director at Aegon, said: "They’ll be asked to identify which of four retirement scenarios best matches their plans on using their pension funds over the next five years.
"Their pension provider must make available a range of four investment pathways designed to be broadly appropriate for these scenarios.
"It’s then down to the individual to choose whether to select one of the pathways or to pick from the wider range of investment funds on offer.”
But the rules only apply to people selecting income drawdown products – where you take a proportion of your total savings each month and leave the rest to grow in your pension pot – and don't apply to people who have taken professional advice.
And there's another problem.
“Investment pathways will not provide any help in deciding how much income to take," Cameron said.
"They will also not look at an individual’s full personal circumstances and attitude to investment risk, and unlike with advice, there’s no ‘personal recommendation’ of which pathway to choose."
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Alistair Byrne, of State Street Global Advisors, said: "People struggle to see beyond the near-term future and cannot always access the type of advice and support they would like. As an industry we need to continue simplifying what we offer, providing guidance and support, and easy paths to follow."
The free Pension Wise service was set up to give over-50s guidance about how they can potentially use their pension pots.
Baroness Ros Altmann, a former pensions minister, said more "user-friendly" services, exciting products, and communication tools should be developed to help enthuse customers.
"Easy and good-value options for looking after pensions throughout retirement, including environmentally friendly options, are lacking for the mass market."
She added: "Pensions are the last money people should spend – they are often the most precious of all investments."
Cameron thinks there's no substitute for proper advice from a professional.
"An adviser will examine each individual’s personal circumstances and make a personalised recommendation on where to invest as well as how much income can safely be taken to last throughout life or meet other retirement objectives," he said.
"Advisers can also review the best approach on an ongoing basis, reflecting changes in investment conditions or personal circumstances.”