Budget bombshell could fuel aspirational spending not retirement stability

Commenting on the outcomes of the Budget yesterday, Damian Stancombe, comments on the impact of the changes on employers and the DC market.

“The Chancellor's announcement yesterday effectively turns a defined contribution (DC) arrangement into a later life savings vehicle rather than a retirement vehicle. Individuals are no longer required to use all or part of their pension pot to secure an annuity income until death. Instead the government has in my opinion wrongly put full trust in the British public by giving them the unlimited drawdown option to raid their pot from age 55.

“Is this good news for UK Plc? The whole point of DC schemes historically was for employers to support their employees in securing a financially stable retirement, especially important in light of the removal of mandatory retirement ages in 2011. The Chancellor has removed this element and now employees can effectively spend all of their savings from age 55 without actually retiring. The reality could be that many members will have the option to use their savings to fund aspirational purchases that they previously wouldn’t have been able to buy, many more could use the money to pay off debt.

“With savings depleted individuals will remain a burden on the company payroll unable to retire unless happy with what the state provides. Given this scenario I can see two things developing quite quickly; a retrenching of the employer DC contributions to a minimum and a review of the retirement vehicle, with collective defined contribution and defined ambition options being real alternative considerations."

An example case study to illustrate the impact of Budget:

Male, age 55 with a fund value of £100,000.

He chooses to take all as cash so would get approximately:

  • £25,000 tax free cash
  • £75,000 @ 60% (NB assumes tax at 40% which would be highest marginal rate) = £45,000
  • = £70,000

He can spend this on debt repayment, holiday homes, new cars etc.

He continues to work for his employer and under Automatic Enrolment they have to continue to pay into a pension. He is on a salary of £30,000 so gets approximately £2,700 per annum into his pension. He plans to work till 68 at which point he may have a fund value of £40,000. But he has spent all his original £100,000 and cannot afford to live on just the State Pension of approx. £8,000. So he continues to work for the employer. The result is potentially a drain on the employer and also creates a job roadblock for younger workers.