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04 Nov 2015

Pensions changes causing genuine shortfall risk, research suggests

New research suggests that pension savers could be at risk of facing a retirement shortfall if they decide to cash in their pension pots early under the new reforms, BBC News reports.

According to an overseas study conducted by the Social Market Foundation, which looked at how similar pension policies have affected savers in Australia and the US, if UK pensioners withdraw their funds at the same unsustainable rate then they will be left with insufficient funds for their retirement.

Since the new legislations came into force in April this year, allowing savers to access their pension pots from the age of 55, thousands of individuals in the UK have cashed in their retirement savings.

Data from HMRC shows that 146,000 people have done this in the last six months, withdrawing a total of £2.7 billion so far. Separate figures from the Association of British Insurers put the total amount at slightly less (£2.5 billion) and suggests that the average withdrawal amount was £15,000.

Financial firms have suggested that this money is being used to either pay off debts and loans, buy a new car or even go on holiday - but the Social Market Foundation is warning that based on the experience of those overseas, there is a real danger that people are spending their money too quickly.

The figures revealed that 40% of Australian pensioners spent all of their savings by the time they reached 75; while in the US, savers are withdrawing an unsustainable 8% of their savings each year.

Despite early withdrawal providing a tax boost for the Treasury, the think tank argues that it will prove ineffective if pensioners need to rely on benefits and the state even more in the long term.

It is now calling on the government to offer older people a mid-retirement ‘health check´ to help them manage their finances and see how rapidly they are spending their money.

Copyright M2 Bespoke 2015

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