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Our pension pot is more 'steady Eddie' than Lamborghini

Have any retirees in Northern Ireland used their money to buy a Lamborghini like this?
Have any retirees in Northern Ireland used their money to buy a Lamborghini like this? Have any retirees in Northern Ireland used their money to buy a Lamborghini like this?

'HAVE you got the keys of the Lamborghini dear?' . . . .

That's not a line you hear very often on the streets of Northern Ireland – and especially not from those living on their pension savings.

I’m referring here to the words of the former Pensions Minister Steve Webb, in relation to the new pension freedoms we’ve had since April last year.

The changes, as most of us know at this stage, allow us to access our pensions savings, and do with our money what we will.

Well, Steve Webb’s comment that he was "relaxed" about retirees deciding to use their money to buy Lamborghinis, if they wish, was an attempt to express his confidence in people to be sensible, once they were released from the previous traditional framework of government restrictions on pensions.

It backfired on him, of course, and later he had to admit that the average pension in the UK is around £25,000, far short of the £250,000 needed to buy an elite sports car.

It’s this notion of being prudent and sensible that brings us to the point of this week’s column.

It now appears that not all savers are being as sensible as Steve would have hoped. Latest research shows that many are forfeiting financial prudence in the interests of having easier and instant access to their cash.

Last week we mentioned new findings by the Citizens Advice Bureau (CAB), showing that most people delving into their pension savings forget to factor the cost of healthcare into their retirement planning.

Well, a second and somewhat disturbing issue has emerged from the same research, for Citizens’ Advice say that 29 per cent of those they surveyed have transferred their pension funds into a savings account.

The savers claim that they have more trust in the old ‘steady Eddie’ bank account, especially with such low annuity rates at the moment, and the risks involved in many other investments.

There was also the fact that this enabled them to avoid expensive annual fees, and of course a cash investment gave them instant access to their money.

The problem with this, of course, is that interest rates on savings in recent years have been at a low ebb.

The reason is that the Bank of England cut the base rate of interest to just 0.5 per cent in 2009, the lowest ever in its history. At the time, many observers thought: it can’t get any lower, it can only go up from here.

But they were wrong, and on July 14 this year, the Bank’s governor Mark Carney announced the rate – which largely shapes levels of returns on our savings - was being cut to 0.25 per cent.

As a result, interest rates on bank savings have been fairly miserable for the past five years and more.

Just to give one fairly typical example: the Barclays Everyday Saver account is offering just 0.25 per cent on balances up to £25,000, 0.4 per cent on balances of £25,000 to £50,000 and only 0.5 per cent on balances of £50,000 - £100,000.

Now let’s consider the predictions of the economic watchdog Trading Economics, which expects inflation in the UK to reach 0.80 percent by the end of this quarter, and to reach 1.4 percent in 12 months time.

That means that if you transfer your pension savings into a bank account, the interest rate could well be below inflation.

Your pension may, in fact, be actually losing spending power, which could have a significant effect over a decade or more.

But it doesn’t have to be this way. A discussion with an independent financial adviser can look at ways of achieving stronger growth, while still having part of your pension where you want it – close to hand and available in a flash.

:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005