Pension freedom: Is a bird in the hand really worth two in the bush?

Some pension freedom retirees are destined to run out of cash, warns Tim Sargisson. But will the finger of blame be pointed at advisers?

This phrase came to mind when I read this week that following Osborne’s pensions revolution withdrawals have topped £8bn.

This has prompted the Association of British Insurers (ABI) to warn that some savers may be in danger of running out of retirement savings by withdrawing too much from their pension pots too soon.

Incidentally, this proverb refers back to medieval falconry where a bird in the hand (the falcon) was a valuable asset and undoubtedly worth more than two in the bush (the prey). The expression fits well into the long list of English proverbs, which are often associated with warnings, especially warnings to do with risk-taking.

The latest figures show that within the first year of pension freedoms 57% of savers have withdrawn less than 1% in the last quarter. However, 4% of people had withdrawn 10% or more of the cash in their pension.

Despite Steve Webb’s optimism, it’s unlikely that any of these withdrawals would have been used to buy a Lamborghini.

Lump sum payments of £4.3bn have been paid out with the average payment being nearly £14,000. More Ford Focus than supercar.

Despite the ABI’s concerns the worries about pensioners running out of cash have largely fallen on deaf ears and maybe this is because the pot size is small, with the ABI speculating that people having other retirement income, for instance, final salary pensions or multiple pots.

Learning from experience 

The body believes that to build a true picture of what is going on requires further investigation, but in terms of indulging in a spot of crystal ball gazing, perhaps it is pertinent to look at the experience of countries who have been at this freedom lark a lot longer than the UK.

For example, it’s 20 years since Australia took this path and for those of you that missed it, in November 2015 the Social Market Foundation report, Golden Years? What Freedom and Choice Will Mean for UK Pensioners compared what Australians did with their pensions.

Its research found that a quarter of Australian pensioners exhausted their pots by age 70, with 44% of people using their pension cash to pay off housing and other debts or to buy a property, while nearly three in ten spend it on luxury purchases such as holidays or new cars. More alarming is the fact that 40% had run out of cash by the time they reached 75.

In the US, pensioners are depleting their wealth by 8% of their pension pot each year, meaning the typical pensioner could run out of cash 17 years into retirement.

Therefore, perhaps it is realistic to believe that the UK will also have an issue with seriously depleted pension funds as a result of the new freedoms.

So in the hand versus bush debate, it seems that the latter provides the sensible option.

Nevertheless in an era dominated by the need for instant gratification, expect that £8bn figure to keep rising.

The real danger for advisers is disgruntled pensioners deciding on who to blame when some conclude that their new, penury existence is someone else’s fault.

Published on 22nd August 2016