Around 2m retiring pensioners will miss out on getting the full new state pension, a freedom of information request submitted by Hargreaves Lansdown has revealed.
Approximately 3.5m workers will reach their state pension age between 2016 and 2020. Of these, just 45 per cent will be entitled to receive a full new state pension of at least £148.40, according to Hargreaves.
In a statement the firm said it is concerned that with the new pension freedoms due to start in April, these people will potentially be able to access their private savings before their state pension age and may spend their pot.
Meanwhile, calculations by Age UK warn many small-pot savers could drain their pot within 10 years if they eschew an annuity after April.
Assuming a £29,000 pension pot, revealed that if people withdrew £3,000 a year non-index linked from the age of 65 and returns on the remaining savings were 3 per cent, their savings would run out when they were 75.
Hargreaves stated that 30 per cent of pensioners will get less than 90 per cent of the new state pension, meaning that they will be entitled to a state pension income of no more than £133.56 a week.
It warned that the position could be even worse, as projections provided by the Department for Work and Pensions are based on the current pension credit minimum income of £148.40, whereas the state pension in 2016 is likely to be around £155 per week.
This means the 90 per cent threshold is actually only going to be around 85 per cent of the new state pension, so 30 per cent of pensioners – 1m people - will be getting less than 85 per cent of the new state pension.
Tom McPhail, head of pensions research at Hargreaves Lansdown, conceded that the new state pension will ultimately be a simpler and fairer system, but added that in the short term it will be complicated and many people are likely to get less than they may expect.
The majority of people falling short of the full state pension are likely to have been contracted out during their working lives; others who get less than 100 per cent are likely to be those with interrupted National Insurance contribution histories such as mothers and the self-employed.
Under the new rules, individuals will have to have contributed National Insurance for 35 years to qualify for a full pension. Those who have contributed at least one year will receive a pro-rata rate.
For those who have been contracted out of the second tier state pension it involves making a deduction from their state pension entitlement to reflect the fact that they have been able to build up a larger private pension using the NI rebate.
Age UK’s new report, which echoes calls for safeguards to be in place for the new reforms, revealed that drawing £2,000 a year would mean the money would last longer, but only until age 81 -or 80 if withdrawals increased annually.
Even if returns on remaining savings were at 5 per cent, people withdrawing £3,000 a year would still have run through their savings when they were 76.
With average life expectancy currently just over 83 for men and just under 86 for women, even modest annual withdrawals mean a significant number of pensioners risk having to survive for several years at the end of their lives without any income from their private pensions, Age UK warned.
The later life charity called for - amongst other things - the introduction of quality standards and regulation of charges for retirement income products likely to be introduced by the financial industry in the wake of the April’s reforms.
Mark Fawcett, chief investment officer at the National Employment Savings Trust, said the findings highlight a fundamental challenge for the pensions industry.
“How can we give savers the flexibility they want without sacrificing the security they need? This isn’t a question of annuities versus drawdown, we need innovative solutions. Otherwise we risk leaving the retirements of millions of people with normal sized pension pots to chance.”
peter.walker@ft.com
