Golden Years? What freedom and choice will mean for UK pensioners

Since April 2015, people aged over 55 have been able to spend their pension savings however they want.

This overturns almost a century of policy stability in which there was an expectation that retirees would annuitise the larger part of their pension savings.

The ‘freedom and choice’ pension reforms were introduced to hand control over to pension savers who if prudent enough to save for retirement could be expected to be prudent in how they use their pension savings. However, alongside the possible advantages, the reforms come with significant potential long-term risks: to individuals, who may consume their pensions too quickly or too slowly; and to the state, which may be left picking up the pieces through the costs of increased claims of means-tested benefits by retirees.

This research uses modelling to assess the implications for UK retirees were they to follow similar paths to those exhibited by individuals in Australia and the United States of America, countries where they have similar pension freedoms. It concludes with policy recommendations to help ensure the long-term sustainability of the reforms, including an ‘Early Warning System’ to identify emerging risks.


The report finds that in Australia and the United States, where they have similar pension freedoms, there were three types of behaviour which were common among retirees:

  • ‘Cautious Australians’ who preserve their capital by reducing it by less than 1 per cent a year.
  • ‘Quick-spending Australians’ who consume pension funds quickly with four-in-10 running out by age 75.
  • ‘Typical Americans’ who on average consume pension savings quite quickly with an average withdrawal rate of 8% per year.

Using new modelling from the Pensions Policy Institute Golden Years? reveals the implications for UK retirees with Defined Contribution pension savings were they to copy these behaviours. Headline findings from the modelling include:

  • Retirees emulating the ‘Typical American’ or ‘Quick-spending Australian’ would exhaust their pensions by year 17 and year 10 respectively – long before they reached average life expectancy.
  • Those who use the new rules to access pension cash early in retirement may maintain their working-life standard of living for a while, but risk it falling sharply in later life compared to those who choose sustainable income and more even consumption.
  • State Pension and Benefits may keep retirees above the definition of poverty, but their incomes risk sinking towards poverty levels if too much pension is taken too early.
  • Retirees following the ‘Cautious Australian’ path of under-consumption face a very low risk of running out of savings, even if they live longer than average. But this comes at the cost of reduced incomes and lower living standards throughout retirement.
  • For UK retirees choosing income drawdown, variable investment returns can result in uncertainty of income in retirement and of the age at which pension savings run out.
  • Decumulation choices also affect fiscal risks to the state associated with the costs of claims of means-tested benefits. For instance, if a man with a pension pot of £184,000 takes the ‘Quick-spending Australian’ decumulation path, this would cost the state over £10,000 more by the point of average life expectancy (age 87) than had they bought an annuity.

The report argues that the Government should create a two-tier ‘Early Warning System’ to understand what retirees are doing with their pension savings and to identify emerging long-term risks both to consumers and the taxpayer. It recommends:

  1. A ‘Retirement Risk Dashboard’ – to help the Government monitor retirement decisions and provide a view on long-term outcomes for consumers and the State. This would be based on a range of statistics such as pension balances, pension cash withdrawal, insurance take-up, levels of investment risks and take-up of guidance and advice.
  2. ‘Personal Pension Alerts’ – to help policymakers intervene where appropriate with the sub-groups it has identified as at particularly high risk. Potential interventions could include: targeted support and advice; initiatives to make retirees think twice before taking one-off decisions such as withdrawing all their pension savings; and, a ‘Mid-Retirement Financial Health Check’ to encourage older people to reconsider their financial position for their later years.

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Download The Report: PDF

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