The new guidelines grant savers free access to their pension pots from the age of 55. Savers have a choice between a one-off capital payout of their pension entitlement, a life-long pension, or a combination of both options. This high degree of flexibility offers people great freedom to shape their finances to match their needs.
Given generally widespread uncertainty as to how to best save for retirement, this is a historic day for the pension system in the UK. In the past, it was often argued that statutory requirements restricted pensioners' choices too much, preventing them from establishing optimum retirement provision. This free access to pension savings is intended to remedy this.
A modern form of retirement provision
On the one hand, UK's increased autonomy for savers is a promising step forward. It enables individuals to tailor their retirement provision to suit changing life plans, breaks in employment, social and economic changes: essentially, a more modern approach.
On the other hand, this change is at odds with the legitimate national interest; namely, providing efficient retirement provision for citizens by establishing criteria for tax benefits for pension products.
Freedom can leave savers unable to choose
But even if a good balance is found between these differing interests, leaving savers free to choose how they want to prepare for retirement is not free of risks.
For example, studies show that individuals find it particularly tricky to estimate their life expectancy, financial needs, and, not least, the impact of inflation on their savings. As a result, they often think they will need less than they do, and fail to save enough privately.
Shares in cruise companies spike
It is revealing that, in the days after the official announcement of this drastic change, shares in cruise companies climbed sharply, whilst shares in pension insurance providers slumped. According to studies on consumer behavior in the UK, pensioners tend to spend more on holidays and cars, whilst in other countries, paying off mortgages and investments in buy-to-let properties are more prominent. In Malaysia for instance, where people can take their entire defined contributed pension at retirement, 70 percent spend their lump sum within the first three years of retirement, writes Allianz pension magazine ProjectM.
Burn through your entire pension in three years
Increased consumer spending can certainly have a positive short-term impact on individual happiness and gross national product, but it also reduces the income available for retirement provision. It is important to plan for your retirement, and even to seek the advice of a professional advisor if necessary. This is the most certain way to prevent poverty in old age.
New regulations have to be comprehensible
The success of these new freedoms is heavily dependent on how easily savers can understand and implement them. The options savers can choose between, and their consequences, have to be clear. If not, fearful of making the wrong decision, people will opt out of pensions entirely – and then make the only guaranteed bad choice.
Similarly, there is a need for institutions that can advise citizens objectively. In the UK, free and independent advice services, offered by consumer protection organizations, have been set up. It remains to be seen how they will cope with the flood of enquiries, and to what extent they can meet people's needs in a targeted way.
It will be interesting to see how things progress, not only in terms of how savers in the UK make use of their new freedoms, but also how the market in England will respond to these changes.
Author of this article: Dirk Hellmuth, CEO of Allianz Global Benefits
Allianz Global Benefits GmbH: Allianz Global Benefits was set up by Allianz at the start of last year. It offers global solutions for company retirement provision, and meets the needs of multinational companies. Its solution concepts include not only products to cover death, occupational incapacity, accidents, longevity and illness on the part of employees, but also customer-oriented services for the head offices and subsidiaries of corporate customers.