Face lifts.

Breast implants.

A Winnebago in which to travel around the UK.

An expensive telescope to stare at the heavens.

According to the independent Pensions Advisory Service, these are just some of the items which pensioners told their financial advisors they would like to buy with their pension pots.

Recent years have seen a spending boom amongst the over-55s – including on luxuries and non-essentials funded by pension savings.

It’s their money, of course, and ultimately, it’s down to them what they do with it. In 2014, the then-pensions minister Steve Webb fuelled controversy by claiming it didn’t matter if pensioners blew their entire pot on a £300,000 Lamborghini.

workplace-money2But if they don’t really have the spare cash, it can ultimately cause financial distress. If they raid the pension funds they spent years carefully building up, there might not enough money left for basics.

As an employer, this should be both a concern for you – and an area where you can help.

After all, you set up a decent pension scheme for your employees because you wanted them to be able to retire comfortably.

You’ve encouraged them to take advantage of the benefits of saving for their later years, including employer contributions and tax relief on their contributions.

And you’ve made efforts to keep them engaged throughout their working lives, including giving them access to professional advice at various stages of their careers.

So, having done this hard work and helped them build up a decent retirement pot, how can you help them to make sure that money lasts throughout their lives?

How much money do people need to live on?

A study by consumer group Which?¹ suggests that a retired couple needs about £18,000 a year for basic living expenses, including things such as food, utilities, transport and housing costs.

workplace-coinThat figure rises to £26,000 a year per household when non-essential things are added to the list, including European holidays, leisure activities and eating out. (It rises to nearly £40,000 per household if long-haul holidays and a new car every five years is added to the equation.)

Of course, the definition of “household” is a loose one, but these figures act as a good benchmark.

If both people in the household claim the full state pension, that will bring in about £13,000 a year. So, they will need to find that sum of money again if they’re going to get near that £26,000 target.

And that means people who blow their savings on unnecessary luxuries might live to regret it later on if their remaining savings don’t allow them to buy an income suitable to maintain the desired standard of living.

 

What do people spend their money on?

Spending money on nice things isn’t a bad thing. Indeed, many people will consider it pointless to build up a nice nest egg only to have a frugal later-life without any luxuries.

Over-50s account for almost half of all the money spent in the UK. Some of this spending is by people during the last 15 years or so of their careers who are earning more than they did previously, but much of it comes from pensioners.

Spending on recreation and culture among people aged 65-74 is almost double that among under-30s. The 65-74 age group spend almost a fifth of their disposable income on things such as package holidays and pets.

workplace-piggybankHalf of those quizzed for a YouGov report a few years ago said their main aim after they had retired was to spend more time travelling.

The 65-74 age group saw spending on travel go up by more than 50% in real terms between 2002 and 2012, and Which? says its members with a ‘comfortable’ lifestyle spend nearly £4,500 a year on it.

Meanwhile, having a decent income can help retirees support their grandchildren. In particular, the rising cost of going to university is something that many grandparents like to help mitigate, with the International Longevity Centre UK reckoning there to be up to 1.7 million grandparents who are expecting to help their grandchildren with university fees.

Tuition fees alone can be more than £9,000 a year, and then there are accommodation and living costs to take into account – as well as some pocket money for students to have during their “downtime”.

 

So, what are the risks?

But whilst it is good that many people can find the money to fulfil their dreams after a lifetime of putting money away each month, there are risks if this isn’t planned properly.

Since the introduction of pension freedoms in 2015, people over the age of 55 have had the ability to access their retirement savings and pretty much do what they want with them (notwithstanding the possibility of a large slice of it going to the taxman).

While this increased flexibility can be a great help to many people, it can also be abused, with serious long-term consequences.

Last year, the House of Commons work and pensions committee heard the story of a man who’d held a decent professional job. He had taken out more than £100,000 from his pension pot – against the advice of his accountant – after being made redundant but had spent it all on gambling, alcohol and a new car.

As a result, he is now claiming housing benefits.

This sad story might not be the norm, but it shows the temptation people can face when they are allowed access to a huge sum of money that was originally designed to help them fund their later life.

Earlier research by the Pensions and Lifetime Savings Association, published in the FT, found that about 20% of those over 55 who had cashed in some of their pension pots had spent the lot, with home improvements proving particularly attractive.

Context is important here – many of these people might have withdrawn only small amounts with the intention of using that money for specific things, as opposed to blowing a huge chunk of it on something silly – but it shows again how it’s possible for people to undo much of their earlier discipline once they hit 55, and then pay the price for many years to come.

And of course, there’s the independent Pensions Advisory Service research mentioned above, which showed a growing interest in plastic surgery amongst retirees.

 

Helping to point the way

workplace-fingerpointAccording to research by LV=, people aged between 45 and 54 spend an average of two hours more each year thinking about a colour scheme for the sitting room or which beach to spend a fortnight on than they do devising a plan to live comfortably for the rest of their lives.

As an employer, you can help correct this balance as part of your pension offering. Press home the idea that pension pots are designed to last for years, and encourage your staff to think carefully about what their financial priorities are, post-retirement.

Most importantly, guide them towards professional financial advice, especially in the years leading up to retirement. Encourage them to seek help from a financial planner, who can help them work out how much money they will need to live on after they retire, and budget appropriately.

Showing them how to get this support takes only a small effort from you, but can help ensure that the money you helped them save, potentially over several decades, is spent wisely – and could save your employees from years of poverty down the line.  

 

¹ Cited in www.telegraph.co.uk/financial-services/investments/investment-pensions-service/how-much-do-i-need-to-retire/ and www.which.co.uk/money/pensions-and-retirement/starting-to-plan-your-retirement/how-much-will-you-need-to-retire-atu0z9k0lw3p

Posted by John Buttress

Topics: Friday Fun

New call-to-action
Questions

Ask The Experts

Want to get in touch?
Just fill out the form below and we will be in touch shortly.

workplace-rocket

Next Generation Savings

Changing Workplace Savings Behaviour for the Better

discover
workplace-bullseye

Consultancy

We provide consultancy services to employers and trustees on contract-based and trust-based schemes, including master trusts. Our proposition encompasses governance, investment, administration and communications.

more
workplace-governance

Governance

Establishing and governing the ideal workplace pensions and savings for your employees can be complex and time consuming. That’s where we come in.

Monitor
workplace-education

Engagement & Education

We use innovative communication channels and modern technologies to help educate, engage and inspire employees across a range of financial topics.

 

Find out more
workplace-deckchair

Retirement

With greater choice and freedom in how and when individuals are able to access their pension fund, there is now an even greater need for early education and advanced planning. Find out how we help.

Discover
workplace-graph

Investment

Our investment research division analyses and rates over 18,000 DC investment funds. The insight we have enables us to support your investment objectives, making sure they're on track to deliver.

track
workplace-health-risk

Health & Risk

Our health & risk service provides tailored combinations of cover and cost to exactly match each employer's requirements, helping you get best value for your benefits spend.

Discover