A major new report recently published by the International Longevity Centre-UK (ILC-UK) provides the first detailed exploration of what certain choices made at the point of retirement today could mean for overall levels of retirement income over the next 30 years.
The report, “Here today, gone tomorrow” models the outcomes of four different approaches to using Direct Contribution (DC) pension wealth:
- blowing the pot on big ticket items,
- putting everything into a savings account, and
- eaving the fund invested.
It finds that even if all those approaching retirement were to annuitise, over half (1.1 million people) will not be able to secure an adequate income unless they use non-pension assets or receive additional benefits on top of the State Pension.
If the DC pot is used to buy big ticket items, an additional 350,000 people (1.4 million people in total) will not be able to secure an adequate income in retirement.
Putting everything in a savings account also risks people running out of money before they die. It is projected that for those years when people have savings to draw on, they achieve a replacement rate equivalent to two thirds of their pre-retirement income, but once their savings run out, they achieve an income of only half their pre-retirement income.
Given that people typically underestimate their life expectancy by upwards of four years, spending savings too early is a real possibility.
Senior Research Fellow Ben Franklin said: “While we do not advocate that everyone should take a particular course of action, our analysis clearly highlights the benefits of annuitising for those individuals who have a high concentration of wealth in DC savings. All other stylised choices risk significant falls in income during retirement.
“Annuities are generally misunderstood and the group, who stand to lose the most from spending everything too early, also score relatively poorly on financial capability, making them particularly susceptible to poor decision making. Without the appropriate support including a new default strategy, these individuals could end up significantly worse-off in retirement”.