17% of retirees to take the money and run
Almost one in 10 pension savers plan to withdraw the entire value of their pension pot and put it into a cash savings account when they retire.
According to research by BlackRock, 17% of UK savers will withdraw all their pension and invest it elsewhere, with 9% investing it to generate an income while 8% will stash it in a cash savings account.
The prospect of so many people dumping their savings into cash accounts is a daunting one, given the low interest rates currently prevailing in the cash savings market.
This appears even more worrying when compared with figures suggesting 55 to 74-year-olds believe they will need an average annual income of £23,000 but believe they can get this from a pot of around £300,000 - when in fact they would need more than £440,000.
About a quarter will stay invested in their pension pots, make regular withdrawals and use some of it to buy an annuity. However, 28% are undecided about what action they will take.
BlackRock surveyed 2,000 individuals in the UK aged 25 to 74 years.
Yesterday, the Financial Conduct Authority wrote to the bosses of pension providers saying they must explain the risks of various retirement options to their customers before they decide what to do with their pension pots.
Alex Hoctor-Duncan, head of EMEA retail at BlackRock, says: 'Being over-reliant on cash for our savings is an issue, particularly as this research indicates that one in 12 baby boomers plan to withdraw all of their pension and put it into a cash savings account.
"The good thing about cash is that the number always looks stable in your account and you can access it when you want. However, inflation coupled with low interest rates, as savers have witnessed over the last five years, means the value of savings has in fact been eroded."
Because of inflation, £1,000 deposited five years ago now carries the spending power of only £853.
Tony Stenning, BlackRock's head of UK retail, adds: "The worry is whether they will gravitate towards the 'safety' of a cash savings account, as more than eight in 10 admit they don't know where to go to get the best income-generating investments and already two-thirds of their assets are held in cash."
3% of respondents say they will withdraw everything and use it to treat themselves. However, a similar survey by pension provider Nest found that more than double that - 7% - said they planned to fritter it all away.
But it is not clear from the research if intention is at all tied to pot size - for example those with smaller pots being more likely to spend the whole thing.
In separate research, the International Longevity Centre-UK found that 70% of respondents said they favoured using their pot to deliver a guaranteed income, especially one protected against inflation.
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An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.