Pensions  

‘Lamborghini’ pension fears overblown: US specialist

‘Lamborghini’ pension fears overblown: US specialist

The fear that pensioners will squander their savings under a flexible pensions regime may not become reality in the UK, a US pensions investment specialist has suggested.

Rachel Weker, vice-president, product development for T Rowe Price Retirement Plan Services, acknowledged that there was a concern pensioners could blow their cash and buy a Lamborghini – an example given by pensions minister Steve Webb – following the April pension changes.

However, she said: “That is not what we have seen in the US. Even when people did cash out, it was for appropriate behaviours, such as paying off debt or purchasing a house.”

Article continues after advert

She claimed Americans tended to seek a retirement income, and would likely choose an annuity if there were a “binary decision” between this and any alternatives.

Bob Ihle, vice-president, investment products manager for T Rowe Price Retirement Plan Services, said that an auto-enrolment system based on inertia, similar to that in the UK, had been effective.

He cited internal figures, which showed that, as of 31 December 2013, schemes where participants were presented with an option of opting out had seen a 69 per cent participation rate.

In October 2014 The Pensions Regulator announced that approximately 4.5m workers had been automatically brought into work-based pension schemes over two years.

Ms Weker also cited figures from a Vanguard Research report of December 2013, Retirement Distribution Decisions Among DC Participants, showing that America could be witnessing similar trends to the UK.

The figures showed the average defined contribution balance for terminated participants older than 60 was $125,000 (£82,833.52).

How will US pensioners get their income?

Statistics from the Cerulli Individual Retirement Accounts, Retirement Edition 2Q 2014 showed those aged 70 or older would source 17 per cent of their retirement income through their defined contribution plan, compared with 33 per cent for those aged between 55 and 59.

The research showed a decline in defined benefit plans, with the number of Fortune 100 companies offering them falling from 73 in 2004 to 32 in 2012.

How will UK pensioners get their income?

According to the 102-page DWP report, The Pensioners’ Incomes Series, 2012/13, state benefits accounted for 44 per cent of pensioners’ incomes, occupational pensions made up 27 per cent, earnings 17 per cent, investment income 7 per cent, and personal pensions 4 per cent.

Source: Cerulli/DWP

Background

In Australia, drastic measures were taken to encourage saving. In 1992 the government introduced rules making it mandatory for employees to contribute into a superannuation fund system.

At the same time, there was a focus on financial education. Geoffrey Conaghan, Australia’s agent general for Victoria, said: “The education system generally has supported the pension literacy in Victoria and more widely in Australia.

“We now have more than 25 years of information and access to data, which helps people make more informed decisions.”

But the 350-page final version of Australia’s Financial System Inquiry, released in December 2014, called for the superannuation system to be made more efficient by, for example, introducing more competition around funds used.

Adviser view