Pensions Freedom – the lessons from history
Fortunately it was the English who were dishing out the lessons against the Australians at Twickenham last Saturday. However, one lesson we would all do well to learn from Australia relates to the consequences of freeing pensions savers from the obligation to buy an annuity.
As the whinging poms stand on the verge of gaining some very significant pensions freedoms, the lessons of history should not be ignored. In 1993 Australia took a very similar step. More than 20-years later a root and branch examination of Australia’s financial system revealed some interesting statistics on how Australians have used their freedom.
The Murray Review, published in July, found that roughly half of those retiring in Australia take their pension as a lump sum. Of this group 44% used the money to pay off housing and other debts, to purchase a home or to make home improvements. A further 28% used the money to repay a vehicle or holiday loan or to buy a holiday or new car. The somewhat worrying result of all this is that a quarter of those who possibly regarded themselves as being reasonably well off at 55, had run out of cash by the time they were 70. The report also suggested that for some, even the mere knowledge that they were due a lump sum, caused them to overspend before they retired.
The inescapable conclusion is that a significant minority of people require more help than is currently available to rise to the challenge of providing for their retirement. It is an enormous step to go from living from month to month, or even week to week, to being given one lump sum and being expected to make it last for the rest of your life.
The need for financial education has never been greater.