Compared to most other countries, the decumulation sector in the UK is very sophisticated. A wide variety of decumulation options are in place to deal with longevity risk. The danger of outliving your money is the most severe risk faced by the public because when it impacts, the individual is too old to return to income generating activities to compensate. So the availability of conventional annuities, flexible income annuities, deferred annuities and enhanced annuities along with myriad drawdown products optimises the choice for retirees so that they can get suitable financial products for their particular circumstances.
However, the range still did not cover the needs of all retirees and so the Government decided that the public should have the right to a complete drawdown of their pension savings, subject to taxation, to give people full control over their retirement. While this is a positive move that will prevent some people being disadvantaged by an over-prescriptive system, it is worth looking at the Australian experience as they have had this right for many years now.
An interim report from their Financial System Inquiry just released has interesting things to say on their superannuation decumulation position. For instance, it appears that almost half of retirees take their pension as a lump sum only and never provide anything as an income stream. Of those who take the lump sum, 44% use it to pay off housing and other debts or make home improvements. The report is clear that this ability to use superannuation lump sums to extinguish debt is encouraging higher pre-retirement consumption and borrowing and is therefore working against the basic reason of compulsory superannuation savings in the first place, i.e. to ensure that people could support themselves in retirement rather than relying on the taxpayer.
In Australia’s case, the interim conclusions are that a combination of retirees’ poor understanding of their retirement needs and a lack of innovation in decumulation products is creating this situation. We are lucky in the UK that the hard work is already done in terms of the variety of products that provide varying degrees of protection against longevity. So how can we ensure that there isn’t a sudden burst of consumer spending, á la Australia, whilst still allowing those who need to access their money to do so?
The key surely is in the face-to-face guidance that is promised by the Government to be in place next April. This guidance is essential if people are to be led through the minefield of possibilities in order to pick a safe path to provide them with the lifestyle they want. For it to achieve its aim it needs to be specific rather than general, mandating the more expensive but far more effective face-to-face approach.
As the Australian report points out, it is ironic that using compulsion because people can’t fully grasp the necessity of saving and leaving the investment strategy to financial experts, as most people stay in the default fund, we suddenly expect them to be completely financially literate in their late sixties and be able to make the key once-in-a-lifetime decision over what to do with their pension savings.
We need to bite the bullet and get the taxpayer to fully fund face-to-face guidance, on the basis that it is far less costly to do so than for the state to pick up the tab when people blow their pension savings and can’t support themselves in the later stages of retirement.
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