How people are spending their pension fund


Fears that pension savers may go wild with their new-found freedom may be overstated. Jamie Clark of Royal London delivers some interesting facts to cool down the hype.

In the good old days, before this freedom and choice nonsense, people with a middle-sized pension pot had no choice but to buy an annuity at some point. Yes, there were other options for those with smaller or larger funds, but most people ended up with an annuity somewhere down the line.

In this new enlightened age of freedom and choice, things have obviously changed a bit. Not least, it has sent scores of behavioural researchers scurrying off into darkened rooms to try and make sense of what people will do. For example, there’s the theory that increased choice leads to increased confusion. This was brought home to me recently when I had to buy, for the first time, pet insurance for our Siamese kittens that are as expensive as they are cute. Did I want money to help me put up posters in case one went missing, and to pay a reward if found? What about dental cover? What excess am I willing to pay? Bizarrely, you can even get a multi-cat discount. I had no idea. So I ended up choosing the easiest option by ticking all the boxes and so bought the most expensive cover. (In hindsight, this was probably their plan.)

With pensions, arguably the easiest option is the most immediately expensive too – taking the whole fund out as a lump sum. Consumers don’t have to get advice so they don’t have to pay an adviser, and the money can be in their account within days. The cost, of course, is a large tax bill. And that’s exactly what some Royal London customers did. They phoned us up and asked for the cash.  No surprises there. It’s what happened next that proved to be quite interesting.

When our call centre dutifully asked the required risk questions and explained the tax implications, some customers thought twice. In fact, our experience is that many customers didn’t realise that their pension was taxable at all.

The biggest fear that has been raised in the media is that many people will blow their hard-earned pension pot and run out of money long before they die. Indeed, some of our customers (normally those with relatively modest-sized pension pots) did end up taking some or all of their pension pot as cash, either with or without advice. So we decided to ask them straight off how they plan to spend it. Here are the results based on a sample of 128 RLI customers:

  • 35% are paying off debts, typically their mortgage
  • 22% are using it for home improvements
  • 15% are investing, from ISAs to purchasing properties
  • 11% are buying a car/caravan 
  • 11% are using it for general living expenses
  • 6% are going on holiday 

Although it is still early days, it is encouraging that the protections put in place by the FCA are working to some extent. And so far the majority of people do appear to have the common sense not to blow all their pension pot on a purchase that won’t give them any return. We need to see how it all pans out over the next few years or so, but in the meantime we can hopefully look forward to a bit of stability and certainty. Let’s hope the new pensions minister agrees.

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