Are Baby Boomers about to go on a spending spree?
After the new pension reforms come into force in April 2015, will the ‘spend it while you still can’ generation splash the cash, rather than conserve it for the future?
People who have worked hard and saved all their lives should be free to choose what they do with their money…. From next year they’ll be able to access as much or as little of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax free.
George Osborne Chancellor of the Exchequer
Before car dealers and yacht brokers throughout the UK get too excited about an impending sales bonanza, it might be a good idea to consider how much money really is sitting in pension pots. Will people just take out large chunks of their pension pot the moment they reach 55? As the pensions minister Steve Webb admitted earlier this year, some could simply use their pension fund to buy a Lamborghini sports car.
Of course, if you did have a pension fund with enough money to buy a Lamborghini (the Lamborghini Adventador Roadster has a list price of £ 292,805) you would be in the minority. This is because, by age 65, the average person’s contributions produce a pension pot of only £30,000 (FT Adviser).
At 55 years of age, most people have at least another 10 years to pay into their pension, so it’s worth considerably less at that time. This suggests the number of additional sales of Lamborghini’s as a result of pension reforms will be very small indeed.
Will the pension reforms lead to money being frittered away?
After your 55th birthday if you retired, the existing rules allowed you to draw down significant sums provided you had an additional retirement income above £20,000 per year. The pension reforms removed this financial threshold, granting the drawdown option to people with any size pension. The changes surrounding pensions now sweep away the existing complex and stringent rules that limited the amount of pension drawdown. Therefore, once you are 55, irrespective of the size of your defined contribution pension, you can take out as much as you like.
If you have a fairly large pension pot the changes make your funds more accessible. Will you join thousands of others who may not be able to resist buying themselves a retirement present? Cars, holidays and property are said to be high on the shopping list of wealthier retirees.
Things may be different for you if your pension pot is nearer the £30,000 UK average. The new flat-rate State Pension will provide you with an income of just over £7,000 a year, which is probably much lower than you are used to when working. This could make it tempting to take more out of your pension to keep up your living standards.
However you may not feel that you have an option if you are unfortunate and find yourself struggling to find work over age 60. Taking your pension early would bridge the gap until you are entitled to your State Pension. This is something that would be impossible under the previous annuity rules where at least 75% of your pension fund would be used to pay an annuity pension for the rest of your life.
One of the comments made by David Cameron suggests pensions may be used ‘like a bank account’. Unfortunately many people get into financial difficulties and it may prove irresistible to dip into a pension ‘bank account’ – a lifetime of savings spent prematurely.
The new rules do offer you more opportunities to spend money for short term advantage. However this spending must be balanced against the potential to leave you very short of money in the future.
Will pension freedom fuel rising property prices?
With freedom comes responsibility and even though the pension announcements could give the providers of products and services for retired people a massive boost, retirees may have other priorities. In Australia, where people are already able to withdraw lump sums easily, the reports say most invest the money or use it to clear debts. Of course some do choose to buy holidays or cars.
It’s not just the car dealers who will be rolling out the red carpet. Some fortunate people have built up substantial pension pots which make a buy to let investment, luxury holiday villa, or even a second home well within their reach. Many observers have expressed the opinion that this newly unlocked spending power will be felt within the property market and could drive up house prices.
I have found increasing evidence that people who can access their pension pot will be looking to upsize. They may not be buying a bigger property, but it will be more expensive. They intend to use their pension to buy the house of their dreams or to simply move nearer to their children.
M Johnson Pension Trustee and employer’s pension scheme specialist
The over 50s will benefit from increased attention
Whether it is from pension pots large or small, a significant sum is likely to be fed into the UK economy. The over 55s have suddenly became much more attractive as prospects for all kinds of goods and services. After 50, you’ll probably notice the benefit of manufacturers and service providers anxious to meet your needs and hoping to take advantage of the easier access you will have to your pension savings.
However the over 50s may not be so easily persuaded to go on a spending spree:
Just because they have some money sitting in their bank account, most people don’t go and spend it. Why should it be different with pensions?
Ros Altmann Pensions expert, Government Champion for Older Workers
The new pension reforms also allow you the freedom to spend money on others. For example, you may prefer to pass money to the next generation sooner, typically to help fund the deposit for your child or even grandchild’s first home.
Unlike an annuity that ends when you die, the new rules offer you the potential to pass on your invested pension after your death. Assuming you have enough money in retirement, you now have the option not to take a pension and leave it invested for your beneficiaries. As in your lifetime, they also benefit from the first 25% being untaxed.
Retire with confidence
With more responsibility for managing your pension, there is always the potential for you to be targeted by the unscrupulous. However the Government have stressed that they want every pension provider to direct customers to a source of guidance and advice, so people understand their options.
George Osbourne, Chancellor of the Exchequer, announced that the Pensions Advisory Service (PAS) would be working with Citizens Advice on the delivery of pension guidance. They can act as the first point of reference with Citizens Advice handling face to face guidance and the Pensions Advisory Service offering the same by telephone.
You’ll find however that there are limitations regarding the information these organisation are allowed to give you, as they are not authorised by the FCA to give financial advice. If you have built up a large pension pot you may already have a financial adviser, if not, Citizens Advice and the PAS are likely to direct you to an independent financial adviser. See the Unbiased website or the Personal Finance Society, although you’ll have to pay for this advice.
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