Pension timebomb: Poor planning could lead to UK pensioners running out of funds

New rules allowing pension savers to cash in from the age of 55 could see people run short of retirement funds, according to analysis of similar schemes overseas. After studying policies in the US and Australia that are similar to recent British pension reforms, the Social Market Foundation found a large number of people would take out funds at an unsustainable rate.

"Copying the 'Typical American' path or the path of the 'Quick-spending Australian' would lead on average to pot exhaustion by retirement year 17 and year 10 respectively," the left-leaning think tank's report states.

"This is far in advance of" the average 22 years for men and 26 years for women, that "retirees can expect to live after retirement," the left leaning think tank added.

"We know that in the UK, the financial literacy and capability of the population is quite low," Nigel Keohane, director of research at the Social Market Foundation, told IBTimes UK. "And we know people don't always plan things in a rational way... people may underestimate their life expectancy."

Figures from HM Revenue and Customs (HMRC) found 146,000 people cashed-in pension pots in the six months since April, withdrawing a total of £2.7bn (€3.8bn, $4.2bn). The so-called "pension freedoms" introduced by the government in April saw a number of key changes including the removal of the need to buy an annuity to provide income until you die.

This gave access to invest-and-drawdown schemes previously restricted to wealthier savers, while the 55% "death tax" on pension pots left invested was also removed. Savers were also not limited to one chance to take a single tax-free lump sum worth 25% of their pension pots, with the rest taxed as income afterwards. Instead, they can dip in and make as many withdrawals as they want, each time getting 25% tax-free and the rest taxed like income, provided their scheme allows this.

But the Social Market Foundation warned its research overseas revealed a danger of pensioners spending money too quickly. It said four out of 10 Australians with pension savings spent everything by the age of 75, while Americans typically withdrew at an unsustainable rate of 8% a year.

The think tank is urging the UK government to give older people a mid-retirement financial health check to assess how fast they are using up their money. While it was not calling on the government to backtrack on the reforms, it "needs to worry about what some of the long-term consequences could be", Keohane said, adding these can be illustrated by comparing what is happening in the UK with other countries.