A report by the Social Market Foundation (SMF) said countries such as Australia and the US, which already allow similar access to pension cash, provide real-life examples of the potential downsides of pension freedom.

The study, Golden Years? What freedom and choice will mean for UK pensioners, said few Australians or Americans choose to secure a guaranteed income for life.

Instead it found three types of behaviour which were common among retirees: cautious Australians who preserve their capital by reducing it by less than 1 per cent a year; quick-spending Australians who consume pension funds quickly with four-in-10 running out by age 75; and typical Americans who on average consume pension savings quite quickly with an average withdrawal rate of 8% per year.

The report used new modelling from the Pensions Policy Institute to reveal the implications for UK retirees with defined contribution pension savings were they to copy these behaviours.

Headline findings from the modelling include:

• Retirees emulating the ‘Typical American’ or ‘Quick-spending Australian’ would exhaust their pensions by year 17 and year 10 respectively – long before they reached average life expectancy.

• Those who use the new rules to access pension cash early in retirement may maintain their working-life standard of living for a while, but risk it falling sharply in later life compared to those who choose sustainable income and more even consumption.

• State Pension and Benefits may keep retirees above the definition of poverty, but their incomes risk sinking towards poverty levels if too much pension is taken too early.

• Retirees following the ‘Cautious Australian’ path of under-consumption face a very low risk of running out of savings, even if they live longer than average. But this comes at the cost of reduced incomes and lower living standards throughout retirement.

• For UK retirees choosing income drawdown, variable investment returns can result in uncertainty of income in retirement and of the age at which pension savings run out.

• Decumulation choices also affect fiscal risks to the state associated with the costs of claims of means-tested benefits. For instance, if a man with a pension pot of £184,000 takes the ‘Quick-spending Australian’ decumulation path, this would cost the state over £10,000 more by the point of average life expectancy (age 87) than had they bought an annuity.

The report argued that the government should create a two-tier early warning system to understand what retirees are doing with their pension savings and to identify emerging long-term risks both to consumers and the taxpayer.

Nigel Keohane, one of the report’s authors and Social Market Foundation Director of Research said: “Pension freedom may be new to the UK but such approaches have been well tried and tested elsewhere. Our research into the real-life experiences in Australia and the USA provides evidence on the range of long-term risks facing retirees and the State, whether that is exhausting a pension pot early, a low standard of living in later life or taxpayers picking up the bill for more means-tested benefits.

“If we really want to know how pension freedom is progressing and avoid such detrimental consequences, we need to introduce an early warning system to monitor retirement decisions, understand the long-term implications and ensure consumers receive the right support.”

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