The Pensions Commission interim report warns that while pension freedoms have given many savers greater flexibility and control, the long-term consequences of behavioural changes - including widespread early access to tax-free cash - could prove detrimental particularly as people live longer and face rising risks around the cost of care later in life.
Maike Currie, VP Personal Finance at PensionBee comments: “More than a decade on from former Chancellor George Osborne’s pension freedoms, the reality looks rather different from the caricature of retirees buying Lamborghinis. Instead, many people are increasingly using pension tax-free cash lump sums to bridge rising living costs, supplement income while still working or cover major life expenses.
“Pension freedoms undoubtedly gave savers greater flexibility and control, but it has also transferred significantly more responsibility and risk onto individuals. This risk taken together with most people simply not saving enough in the first place, means there is a real danger that the flexibility that comes with pension freedoms will become tomorrow’s retirement crisis.”
The Pensions Commission interim report highlights growing concern that pensions are drifting away from their original purpose - providing a sustainable income throughout retirement.
More people are using pensions to top up earnings while still working, while early access to tax-free cash has increasingly become viewed as a “normal course of action” or a “no brainer”. The report references FCA research showing some people increasingly view tax-free cash as ‘fun money’ for holidays, cars and one-off spending, rather than as part of their long-term retirement income strategy and with little regard for the impact on long-term financial security and pension adequacy.
Maike Currie, VP Personal Finance at PensionBee comments: “After a lifetime of saving into a pension, that 25% tax-free lump sum is often seen as the reward - the pot of gold at the end of the rainbow - whether that is funding the dream cruise, a classic convertible or long-awaited kitchen renovation. At the other end of the wealth spectrum it is also being used to clear debts and/or supplement living expenses.
“Rumours of raids on pension tax-free cash ahead of recent Budgets also triggered a sharp rise in tax-free cash withdrawals, which hasn’t helped.
“But it is important to remember that spending that lump sum today will directly affect retirement income tomorrow. No-one knows how long they will live and how long their pension pot needs to last. As the report points out, longevity remains one of the biggest blind spots in retirement planning. The latest population projections from the Office for National Statistics show the number of people aged over 85 is expected to double by 2049, while healthy life expectancy is moving in the wrong direction. We are not just living longer, we are living longer with illness, frailty and growing care needs.
“In a pension system that increasingly relies on individuals making complex decumulation choices, savers need far more support to navigate decisions that can shape their financial security for decades.”
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