x Abu Dhabi, UAESaturday 20 January 2018

UK pension freedom a matter of life and death

Britons are being encouraged by their government to do what they want with their pension pot. But blowing it all in one go might not be such a wise idea warns Nima Abu Wardeh.

What will you be up to on November 4, 2069? Whatever it is, I'm afraid I cannot join you, as I'll be busy.

According to www.deathclock.com, I'll be dying. Not many people want to be told the date of their demise, but this is exactly what the British government wants to see happen as part of a change in regulation that was announced last month - giving savers the freedom to choose how they want to access their pension funds when they retire, and what they want to do with the money.

The freedom to do as they wish with their money. Sounds reasonable doesn't it? After all, it is their money - they saved up and now it's pay out time.

For some, it'll be like winning a jackpot. After all, we've had it drilled into us that retirement is our time to do with as we wish, and now many savers living in Britain will be able to do just that - even if it means blowing their pension pot on a Lamborghini, the extreme example given by the UK's pensions minister, Steve Webb, when he was explaining that people have the right to choose what to do with their own money.

But it'll be a short-lived dream for them - those who'll burn a black hole into their savings pot that can never be filled again.

Let's get some background. Up until last month, most pensioners in the UK were obliged to exchange their pension pot for an annuity upon retirement. This is a financial product that pays out a regular income in return for a lump sum. Conventional annuities pay out an income for life, which is great in that people who buy one need not worry how long they'll live, they'll have money coming in till they die.

And it is immensely lucrative - the British annuity sector is worth about £12 billion (Dh74.04bn) annually.

The change in pensions regulation has brought with it choice - a great thing, especially as annuity rates have diminished - and it is enticing companies to create pension products that suit our requirements.

Why is this important for you and me here in the UAE? It's important because it reminds us - again - that we must look at providing for ourselves for the rest of our lives, and because it gets us thinking about how we can do this, and is an opportunity to learn from what's going on around us in the world.

I'm very keen to find out how these pensioners in Britain will behave - will they blow their savings or continue to serve their future selves? Their actions will instil either hope or horror in policymakers. The problem is that the price for getting it wrong is very high indeed.

Back to the victory of freedom of choice. Is it wise?

It all depends on what people end up doing with their pension funds. If they continue to think of the future and how they need to provide for themselves, with more products to choose from, then yes. But let's also remember that the idea of retirement is often tied in with the notion of freedom. Of not having a care in the world, of having paid our dues, and that we deserve to relax, unwind and simply enjoy the moment. And so it's reasonable to expect that some of these disciplined savers who have spent decades denying indulgence to their present selves so that their future selves will live well will want to throw caution to the wind and enjoy the moment.

Very few people can actually afford this.

The problem is that, for most, burning a wad of cash will make their chance of a decent, solvent life go up in a puff of smoke if these people aren't rich to start with, or live beyond their calculated death date.

This is not that uncommon - the Institute of Fiscal Studies found that men in their 50s tend to guess their expected year of demise two years too early, going by longevity studies - women, being the more pessimistic lot, on average predicted they would die four years earlier than the stats state.

The problem is that if you run out of money before you die, then who's going to look after you? If you don't have a benevolent benefactor, then you need to look at this very carefully.

Positive thinking is a great thing - it'll boost your chances of living longer than the predictions of the charmingly named death clock - but therein lies a problem. How are you going to pay your way if you're lucky enough to outlive projections and predictions? How about this for an idea - something that'll give you an income for life and insures you against the unknown ... it's called an annuity.

Nima Abu Wardeh is the founder of the personal finance website cashy.me. You can reach her at nima@cashy.me.

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