Does the UK face a pensions blowout?

Pension changes: How to invest    10:24 AM ET Tue, 7 April 2015 | 02:24

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Changes to U.K. pension rules -- which allowing savers to raid their pension pots -- have prompted concerns that some people could splurge all of their savings in one go. But, according to some analysts, those fears could be overdone.

The changes, which were announced by U.K. Chancellor George Osborne last year, but launched earlier this month, mean that individuals over the age of 55 do not have to wait until retirement to start withdrawing from their pensions.

People can now do as they wish with their savings rather than having to buy an annuity, which provided a fixed, regular income and was a legal requirement until now.

From April 2015, however, individuals saving into defined contribution (DC) pensions are to gain complete access their savings from the age of 55, while those with funded defined benefit (DB) pensions are able to exchange their future retirement income for a pension pot before retirement and access their savings flexibly.

Run out of money?

The removal of the annuity requirement has led to some concerns that savers could splash the cash and run out of money during their retirement.

Earlier this year, Age UK warned that the reforms could lead to "significant numbers of older people running out of money."

Calling for stronger safeguards, the charity said in a statement: "With average life expectancy at age 65 currently just over 83 for men and just under 86 for women, even modest annual withdrawals mean a significant number of pensioners risk having to survive for several years at the end of their lives without any income from their private pensions. For many this will mean life will become financially much tougherwith some struggling to make ends meet."

Pension experts don't agree, however, arguing that savvy savers will be wary of larger tax bills.

Tax implications

Thanasis Zovoilis | Moment | Getty Images

The over-55s can take up to 25 percent of their pension pot as a tax-free lump sum, but any further withdrawals will be subject to tax.

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"There are no restrictions on how much income you can withdraw from your defined contribution pension pot, but any income that you do withdraw (and it is possible to withdraw your whole remaining pension pot in one go) may be subject to income tax at your marginal rate so there is a risk that taking the whole pension pot will push you into a higher-rate tax band for some or all of the amount taken," the government's Pensions Advisory Service warns on its website.

Will Aitken, senior consultant at professional services firm Towers Watson, told CNBC that it was unlikely that people who had saved diligently all their working lives would go out and "splurge" the cash.

"We asked people last year what their intentions were after these changes and we got a strong, clear response that tax would play a big part in their decision," he said. "Providing people understand the tax implications of these changes, they won't be taking their money out (of their pensions) overnight, we don't think."

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However, people with smaller pension pots could be tempted to take the money out, he added -- particularly if they had debts, such as credit card bills, to pay off.

Savers 'soul-searching

There appears to be a lack of enthusiasm about the changes among savers, according to research published late last year by Towers Watson. The firm questioned over 2,000 employees aged 50-64 about the changes.

"Almost 75 percent thought the reform would have no impact on their level of pension savings and only 19 percent reported they were more likely to save more as a result of the (reforms), with 6 percent reporting they would actually save less," its report said.

While 30 percent of older workers thought the reforms meant they would get a better deal in retirement, 18 percent thought the opposite.

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Dean Mirfin, group director of equity release advisory service Key Retirement, told CNBC that his company was seeing a lot of people investigating their options, "but not necessarily exercising" their right to cash in on their pensions.

"Lots of people are talking to us about cashing in, but once they delve into the details and they see what the tax implications are, they're really then thinking about whether they have a need for the cash," he said.

"There are considerable tax charges for larger funds and people are doing a lot of soul-searching when looking at their pensions and deciding whether to take them out."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld