The UK is going against international experience in legislating for freedom and choice, finds a Pensions Policy Institute report
A new report by the Pensions Policy Institute examines how savers use retirement products across the globe. Looking at Australia, the US, New Zealand and Ireland, it is clear that the UK is moving in a very different direction. Considering the experiences of these countries, it’s difficult not to conclude that the UK could find itself out on a limb by giving savers the freedom to make choices.
Although they are available, annuities have never taken off in the US and Australia. The Pensions Policy Institute cites a number of barriers: “Levels of pre-annuitised wealth, regulatory frameworks and bequest motives. Lack of availability of annuities may also perpetuate their lack of popularity. There are also behavioural factors, such as loss aversion.”
Drawdown has proved more popular. In Ireland, where savers can choose to buy an annuity or opt for drawdown, drawdown is the preferred option.
That said, in Ireland only savers who can prove a guaranteed income of €12,700 from other sources can use drawdown: if they already have a guaranteed income, then why not draw down the rest of their savings?
Drawdown is also popular in Australia. But 25% of people aged 55 deplete their balances by the age of 70, the PPI observes. Savers often use their pension pot to pay off debt in Australia. Of the 50% of Australians who choose a lump sum, 32% use it to pay off housing costs, purchase a home or make home improvements, and 12% used it to pay off other debts.
The PPI notes: “The relatively high rates of personal debt in the UK suggest that using DC savings to pay off personal debt may be popular; however, individuals should be aware of how these withdrawals will be taxed.”
The research contains the now-popular observation that Australia is moving towards annuity-like products while the UK, with its seasoned annuity market, is moving in the opposite direction.
The grass is always greener, of course. But it is worrying to read that drawdown isn’t really fulfilling its intended purpose in Australia, with so many spending their lump sum on housing and others using up their money by the age of 70.
Then again, perhaps it’s out of date to criticise people for spending some of their pension on housing. It’s certainly out of date to expect that a pension ought to provide people with some money to live in during a short retirement phase.
The revolution in life expectancy has put paid to that – but with it rising, surely now would be the right time to invent a product which gives people a certain income, irrespective of how long they may live? Oh, wait…