9th June 2015

Royal London: How people are spending their pension fund

Jamie Clark, Business Development Manager

In the good old days, before this freedom and choice nonsense, people with a middle sized pension pot had no choice but to buy an annuity at some point. Yes, there were other options for those with smaller or larger funds but most people ended up in an annuity somewhere down the line. 

In this new enlightened age of freedom and choice, things have obviously changed a bit. One result of all this has been to send some behavioural researchers scurrying off into a darkened room to try and make sense of what people will do. For example there’s the theory that increased choice leads to increased confusion. This was brought home to me recently when I had to buy, for the first time, pet insurance for our rather expensive and very cute Siamese kittens. Did I want money to help me put up posters in case one went missing and pay a reward if found? What about dental cover? What excess am I willing to pay? Bizarrely, you can even get a multi-cat discount! I had no idea. So I ended up choosing the easiest option by ticking all the boxes and bought the most expensive cover. With pensions, arguably the easiest option is the most immediately expensive too - taking it all out as a lump sum. You don’t have to get advice so you don’t have to pay an adviser, and the money could be in your account within days. The cost is a large tax bill. And that’s exactly what some Royal London customers did. They phoned us up and asked for the cash.  No surprise there. It’s what happened next that’s quite interesting. When our call centre dutifully asked the required risk questions and explained the tax implications, some customers thought twice. In fact our experience is that many customers didn’t realise that their pension was taxable at all and some advisers misunderstood the application of ‘emergency tax’ on the payment.

Another fear is that lots of people will blow their hard earned pension pot.  Of course some of our customers (normally those with relatively modest-sized pension pots) did end up taking some or all of their pension pot as cash either with or without advice and we decided to ask them how they plan to spend it. Here are the results based on a sample of 128 RLI customers: 

• 35% are paying off debts, typically their mortgage
• 22% are using it for home improvements
• 15% are investing, from ISAs to purchasing properties
• 11% are buying a car/caravan 
• 11% are using it for general living expenses
• 6%   are going on holiday 

While it is early days, it is encouraging that the protections put in place by the FCA are working to some extent. And people appear to have the common sense not to blow all their pension pot on a purchase that won’t give them any return. We need to see how it all pans out over the next few years or so but in the meantime, what would be nice is a bit of stability and certainty. Let’s hope the new pensions minister agrees.

Pension Reforms, Pensions, Retirement