Data gathered during the early weeks following retirement freedoms that came into force in April have exposed a lack of understanding of pensions, according to experts.
According to a report compiled by pension firm Avacade Future Solutions based on 10,000 survey respondents, the average pension pot in the UK is £33,000, just 10 per cent of the £334,000 needed to produce the average desired annual pension income of nearly £21,000.
A pension pot of £33,000 will leave people with a personal pension income of just £2,062.50 a year based on current annuity rates.
Meanwhile, another report by the firm on ‘pension intensions’ from a sample size of just over 2,000 UK adults found that close to one in five 55-64 year olds will, in the next few years, withdraw and use all or some of their tax-free cash lump sum, in many cases simply moving to other savings vehicles that are not similarly tax-sheltered.
Of those who are planning to take a lump sum, 15 per cent would transfer their money into a savings account, increasing to 21 per cent for those aged above 55.
Tony Mudd, divisional director at St. James’s Place, told FTAdviser the report shows many are misunderstanding what a pension is in basic terms.
He said: “It’s unfortunate that when people think of a pension they think of income and they do not think of it as a savings vehicle scheme. It’s a savings account yet 15 per cent will transfer their pension into another savings account. It’s an ill-advised, mis-judged decision.”
As an example, Mr Mudd said that a consumer would pay £7,500 tax in withdrawing a £50,000 pot, which would leave them with £42,500 to sit in an account which would incur further tax.
“The reality is that I don’t think the government will be surprised to see these figures. For people who will take advantage the freedoms could be something that helps them save tax or pass their pots onto further generations.
“Those that just take the money out will be contributing a lot of money to the Treasury.”
He added the average pension pot size of £33,000 is “almost at odds” with decisions on tax-free cash, such as holidays. “They will need every penny for a decent income,” Mr Mudd said.
The survey also found lack of knowledge working in the other direction, with 47 per cent saying they are not using the freedoms due to a lack of understanding and ability to benefit from the changes.
Almost one in five who have no plans to use the freedoms said they are fearful of running out of money, while 14 per cent do not believe they have enough money saved, 13 per cent are worried about making a mistake while self-managing, and 11 per cent feel they have not had sufficient guidance.
Elsewhere, around 14 per cent taking cash of those will invest in their own home; 13 per cent will invest into other products; 14 per cent aim to ‘improve their standard of living’; 14 per cent plan to go on holiday; and 13 per cent want to support their children.
Of those aged 55 plus who are planning to take out a cash lump sum, 37 per cent are unsure how they will spend or invest the windfall; 13 per cent will invest into non-property products; 9 per cent plan to invest into their own homes; and 8 per cent plan to improve their standard of living.
Lee Lummis, chief executive of Avacade Future Solutions, said: “As with any industry shift of this scale – especially in such early stages – the degree of national knowledge share is in its infancy.
“The overriding sentiment that we have analysed in our own engagement with pension planners supports this latest report; essentially a nation hungry for better standards of living in retirement, however one that is uncertain in terms of how best to achieve this.
“Moving forward, as activity gains momentum, a huge responsibility lies with information providers to ensure pension planners feel confident in the entire span of options available to them, informing intelligent, relevant decision making only.
donia.o’loughlin@ft.com
