Betting your pension
This article was originally commissioned for Inner Workings, a monthly column written by Tom Murray, in the December 2018 edition of the Actuarial Post.
The move by the government to reduce the shocking social side effects of fixed-odds betting terminals, mainly based in bookmakers’ shops, was welcomed by many in the UK as a good start in dealing with the issues that can arise from addiction to these machines. Under the new law due to come into effect in 2019, the maximum stake will be reduced to £2, thereby requiring 50 losing spins to lose what could have been lost before on a single spin.
Large amounts of money being lost in just a few hours, as users chased a big win or tried to recoup big losses, meant that hundreds of thousands of households are damaged by this type of gambling every year. But thanks to those parliamentarians and social campaigners, including one minister who resigned from the Cabinet to pressurise the Government to move more quickly, the amount of damage a person can inflict on their own and their family’s financial position via these machines is now extremely reduced, albeit not eliminated.
How unlike the position with pension freedoms, where the freedom to drawdown one’s income at any rate means that many people are now unwittingly gambling on their future income when they select the rate at which they wish to draw down from their pension funds. And all with the encouragement of the government. Prior to these freedoms being introduced, the amount of risk one could take with one’s pension was restricted for most people and essentially was one of timing and of one’s ability to shop around for the best annuity deal. Once the deal was struck, the person was guaranteed a regular income all the way through the rest of their life and could plan accordingly.
Given the majority of retirees are now opting for income drawdown products rather than annuities, the scale of the risk they are undertaking with their financial future has risen astronomically. As no one can see the future, it is impossible for anyone to be accurate about how long the money has to support him or her in retirement, nor what precisely their needs might actually be in terms of care etc.
Royal London Life recently reported that 47% of their customers had chosen rates of drawdown that means they have more than an 85% chance their income will last for their entire life. However, the logical corollary is that over half of their customers had less than an 85% chance of their income lasting for their entire life.
The key word that leaps out of all of this is the word chance. Because, by foregoing the guarantees that comes with annuities, retirees are quite simply gambling on whether they will live longer than their money lasts or the other way around. Given the severity of the issue and with people now living, on average, 18 years into retirement, this is a huge gamble for society. Yet, far from seeming concerned, the government encourages this risk-taking, echoing the mantra that people know best how to spend their own money.
The problem with people exhausting their money too quickly is that by the time they truly realise there is a problem, they will likely be in their late seventies or early eighties. This is a point in their lives when it becomes almost impossible to resume an income earning career, so there is no choice but for them to fall back on the state for support.
It has always been recognised that people underestimate how long they will live, and therefore lots of retirees will take more of the money upfront than is sustainable in the long term. No amount of advice is going to help the individuals make the right choice as averages do not apply to individuals i.e. knowing that the majority of people live 18 years into retirement doesn’t help you to know whether you will have to plan for a three-year retirement or a thirty-year retirement.
The government is right to be helping people deal with the problems of addiction to risk taking as exemplified by the FOTBs, but it is incongruous when they are at the same time allowing a far more vulnerable group to take the kind of decisions that are risking their entire financial future. These are the glory years of the pension freedoms, when no one has really had them long enough to get into trouble but in another decade, it is likely that we will see many people become destitute, who had the means of supporting themselves but squandered it early.
Then, we will see the calls start for the government to step in and prevent people from impoverishing themselves, but it will be too late. This is a foreseeable problem that neither the politicians nor the regulators want to open their eyes to. Odds on, it will result in much castigating of the industry for not self-regulating in the first place, but the ultimate loser will yet again be the taxpayer who will be hauled back in to provide support. They will be the biggest losers without ever having made a bet in the first place.