Retirees avoid overspending yet more become insolvent

Since the advent of the pension freedoms, there have been fears over whether people will be able to plan their finances in later life.

Market research firm YouGov said that pension withdrawals are now more than double what policyholders expected to take out last year.

YouGov states that in August 2015 over-50s with DC pensions thought they would withdraw about £15,400 from their pots, but in July this year those who had taken money out in lump sums said they had on average withdrawn about £35,300.

The figures don't tell the whole story

However, this interpretation might be overly pessimistic, said president of the Society of Pension Professionals Hugh Nolan.

"With these things the devil's in the detail. It does look like they’re comparing apples and oranges," he said.

Nolan pointed out that people with DC pensions – those expecting to withdraw around £15,000 – might not be in the same data set as people with DC pensions who have actually withdrawn money.

In addition, Nolan said, it is not clear whether the money withdrawn from pensions was spent or put into other savings options, such as Isas or bonds.

“The stats that we’ve been seeing generally, which I was more surprised about to be honest, would suggest that everyone was very sensible about the money they take out,” Nolan said, referring to figures from the Association of British Insurers, which show most savers withdrew 1 per cent or less per quarter.

Silver insolvencies are on the rise

But while withdrawal figures suggest most people avoid overspending in retirement, another trend might be emerging.

According to accounting and consulting network Moore Stephens, the number of over-65s becoming insolvent last year went up to about 5,200, from roughly 4,700 in 2009, even as insolvencies overall reduced significantly.

Nolan said the number of insolvencies in the age group might have gone up because there are more over-65s, but conceded there is “an increased number of pensioners who haven’t got proper pension provision”.

Education and information are therefore key. Nolan said providers, partly out of the fear of being sued years later, generally provide those. “What we really like to do is go for information,” he said.

Pension providers step into the gap

The Financial Conduct Authority’s requirement to give personalised risk warnings also means providers could effectively start to act as a quasi-guidance service.

Kate Smith, head of pensions at provider Aegon, said when people want to make use of the freedoms they are encouraged to use Pension Wise or independent financial advisers as well as receiving the risk warnings.

However, she said, “if they just take the cash then there’s very little the pensions industry can do, other than warn them up front”.

Smith noted that apart from annuities, there are guaranteed drawdown products to give a lifetime income, which she said are more flexible because retirees can go back to pure drawdown.

“It’s a good idea to combine some sort of guarantee with flexibility, because then you guarantee your necessities, such as your electricity bill, and the flexibility could be for luxury-type things like holidays,” she said.

Online tools can also help retirees manage their finances once they are in drawdown. Willis Towers Watson’s mastertrust LifeSight, for example, highlights to pensioners every time they log on how long their pot will last if they keep withdrawing at their current rate.

Rob Yuille, manager for retirement policy at the ABI, said a continuous effort has to be made to remind retirees that their pots will need to last for the rest of their lives.

“We need to continue to emphasise that your pension savings need to last for your whole retirement, and once they are gone, they are gone.”