Ever since the Pension Freedoms were announced in 2015, there have been concerns that many people would simply cash in their retirement savings and squander the money. A recent study however, suggests that this is far from the truth.
Older people are holding onto their savings and are reluctant to spend money impulsively, according to research from the Institute for Fiscal Studies (IFS).
A survey published on 11th June 2018, looking at how individuals use their wealth once they retire finds many are not drawing down as much wealth as they could.
It says, on average, individuals will draw down just 31 per cent of net financial wealth between the age of 70 and 90.
Even among individuals in the top half of financial wealth distribution, net financial wealth appears to be drawn down by just 39 per cent, on average.
The IFS suggest this wealth, whether held in housing or in financial assets, is likely to be passed on to later generations.
However, inheritances will typically only be received at relatively older ages and so someone currently aged 40 might expect to receive a bequest from their parents at age 63.
IFS associate director Rowena Crawford says the way wealth is inherited will have implications for the level and distribution of resources among current working age individuals, particularly those with wealthy parents and few siblings.
Therefore, the increased freedom people now have over how they spend their pension wealth in retirement will require careful monitoring, she adds.
Royal London policy director Steve Webb says: “This report confirms that the vast majority of pensioners who have saved through their working life are cautious with their money and leave unspent wealth at the end of their lives.
“This is great news for those who believe in pension freedoms. The IFS research suggests that the biggest concern about pension freedoms is likely to be about excessively cautious retirees spending too slowly than it is about reckless retirees blowing their pension savings on lavish living.”
The key takeaways for me from the above are as follows:
- ‘Individuals will draw down just 31 per cent of net financial wealth between the age of 70 and 90.’
- ‘Someone currently aged 40 might expect to receive a bequest from their parents at age 63.’
Regular visitors to my office will know I stress these points at virtually every client meeting. The whole point of proper financial planning is to ensure that you are able to enjoy the best lifestyle possible, within your means and if your primary objective is to help your children, to enable you to do this before you die and the children are really too old to benefit! A robust Lifelong Cashflow Model should be able to give you the confidence to make these hugely important decisions.
As always, if you have any concerns about your financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.
With kind regards,
Graham Ponting CFP Chartered MCSI