Retirees are likely to run out of money in their 70s and early 80s under the pension freedoms, an international report has claimed.
An analysis of overseas schemes by The Social Market Foundation found a significant proportion of people withdrew funds at an unsustainable rate.
The left of centre think tank studied policies in Australia and the US that are similar to the UK’s pension reforms, as well as schemes in Switzerland, Canada and Denmark.
It has used the international pension data to predict how savers in Britain will fare if they choose to make use of the new rules.
There are some 2.2 million people aged 55-70 with money invested in “defined contribution” (non-final salary) pensions in Britain. While most will be sensible with their money, the report warns that many will spend it too quickly and that, as a result, the cost to the state of the reforms has been grossly underestimated.
In the UK, thousands have cashed in their pension pots since April.
The new rules, which came into force in April, allow pension savers to cash in their pension pots from the age of 55.
Research by financial firms indicates that the funds are being used to pay off debt, upgrade the car or go on holiday.
The Social Market Foundation warned that evidence from overseas revealed a danger of pensioners spending money too quickly.
It said four out of 10 Australians with pension savings spent them all by the age of 75.
This would leave an average man retiring now at the age of 65 with no pension income for 12 years, as he would be expected to live until 87. A woman retiring aged 65 is expected to live until 89 and would therefore have to survive 14 years without a private pension income.
The study found that a typical American made their pension last just 17 years, spending their fund at a rate of 8 per cent a year.
The think tank is urging the government to give older people a mid-retirement financial health check, to assess how fast they are using up their money.
Early withdrawal of funds provides a tax income boost for the Treasury – it is expected to take double the amount it predicted during the first year of reforms.
However, if pensioners use up savings, the eventual effect is an increased reliance on benefits and the state – a long-term cost.
For further advice on pensions and retirement planning, please contact the expert team at Birchwood today.