Savers 'need virtual jam jars'
Pension savers should be provided with "virtual jam jars" for their money which would guard against them unexpectedly running out of cash when the new retirement freedoms come into force this spring, Age UK has said.
The charity wants to see more safeguards put in place to help people control their spending when the huge shake-up of the way that people aged over 55 can take their retirement pots comes into action in April, giving them vastly greater choice over when and how they spend their money.
People approaching retirement will no longer be herded towards buying a retirement annuity with their defined contribution (DC) pension pot. Instead, they will be allowed to take money out of their pot, in a series of slices if they wish to, subject to their marginal rate of income tax in that year.
Age UK warned that with life expectancy for today's 65-year-olds currently at around 83 years old for men and 86 for women, even modest withdrawals from their pension pot could mean a significant number of pensioners risk having to survive for several years at the end of their lives without any income from a private pension.
Its report, titled Dashboards and Jam Jars, calls for pension providers to develop new "pension jam jar" tools to help people to budget, control their money and reach goals for their cash.
Once consumers have made a plan, specific alerts can be used if they are departing from it or at risk of running out of money or triggering a higher rate tax charge, the report said.
People should also be able to see a "pensions dashboard", which would gather electronic data from all their pension schemes, so that they could see them all in one place, including their state pension entitlement, the report said. This would help them to make decisions based on an overview of all their money.
Age UK is also concerned that with people being presented with a huge array of choices in the new era of pension freedom, strong action needs to be taken to prevent any surge in them falling prey to pension scams. It said that a powerful body should be nominated to take charge of reducing the threat of scams.
Annuities provide pensioners with a yearly payout, usually for the rest of their lives, meaning they act as a guarantee that someone will not run out of cash before they die. But annuities have been controversial in recent years, due to people not shopping around for the best deal and receiving disappointing rates.
Age UK said that in 2013, the median average annuity was bought with a pension fund of around £20,000. Giving an example of how quickly someone could potentially run out of cash under the new pension freedoms if they withdraw small chunks every year, Age UK said that if someone withdrew £3,000 annually from a £29,000 pot from the age of 65, and the returns on the remaining savings were 3%, their savings would run out by the time they were aged 75.
The Government has said that everyone who is entitled to use the new pension freedoms will be offered free, impartial guidance to help them to decide what to do with their money. This will be provided by Citizens Advice and the Pensions Advisory Service (TPAS).
But Age UK said that there must be a "second line of defence" for people who choose not to take up this guidance, such as a check-list of questions or a cooling off period for people who ask to cash in their whole pension pot in one go.
There should also be default options designed to nudge people in the direction of options that at least meet some particular minimum standards, the charity argued.
It said: "This is such a high-stakes decision, with such lasting consequences for individuals and their families, that we think some measures are necessary."
Caroline Abrahams, charity director of Age UK, said: "We welcome people having more flexibility in how they use their pension savings.
"But that makes it even more important that we fully understand the implications and consequences of our financial decisions and can trust the financial services in which we have invested.
"That's why we believe that there must be additional checks and balances introduced to the pensions legislation in addition to the impartial guidance that will be available. This is too important to be left to chance."
A Treasury spokeswoman said: "Our radical pension reforms are about giving people more choice when they retire and have been almost universally welcomed by consumer groups and pensions experts.
"The Government believes that people who have worked hard and saved all their lives should have the freedom to decide how to use their savings and the guidance to help them make good decisions.
"We're delivering a guidance service to rigorous Financial Conduct Authority standards, which empowers and educates people so they can make their own, informed choices and confidently engage with the pensions industry."