The pension freedoms were touted as a way to give retirees control over their pension pot, letting them spend their hard-earned savings as they see fit and, ideally, create an income that will last for the duration of their retirement. Yet unfortunately, while reports of pensioners blowing their pots on Lamborghinis are few and far between, concerns remain over the sustainability of many pension pots, with a lot of retirees on course to spend their savings far too quickly.
That's according to research from AJ Bell, after finding that many of those who have flexibility accessed their pension since April 2015 have probably accessed a bit too much. The figures show that 44% of survey respondents are withdrawing more than 10% of their pension savings each year, yet given that the average pension pot is £118,000, it could last just 12 years if withdrawals continue at the same pace.
Unfortunately, it's those in the younger age group who seem to be withdrawing too much, and could therefore find they run out of money far too quickly: 57% of respondents in the 55-59 age bracket are withdrawing more than 10% of their fund each year. This figure falls to 43% of those aged 60-64, and 34% of people in the 65-69 age bracket.
Those in their 70s and 80s may of course be able to cope with withdrawing 10% or even more of their savings each year, but younger age groups may want to proceed with more caution. Indeed, even withdrawing just a little less could make all the difference – AJ Bell's calculations show that if retirees withdrew a far more sustainable 6% each year, the money could last for 26 years, and they'd still have an annual income of £7,080. That's before the state pension or income from any other savings are taken into account, too.
The problem, said the report, seems to be that the younger people are, the more they underestimate how long their retirement income needs to last for. Some 51% of those aged 55-59 anticipate that their pension income will need to last for 20 years or less, while 24% think it'll need to last for no longer than 10 years.
In reality, men in this age bracket could live for another 24 to 27 years, and women could live for 26 to 30 years, according to ONS data. If their pension income only lasts for 12 of those years, they could easily fall into pensioner poverty in later life.
"It seems that people using the pension freedoms are playing a life expectancy guessing game and are often coming up short," said Tom Selby, senior analyst at AJ Bell. "The evidence from our research suggests many people might be severely underestimating how long their pension income will need to last for and as a result the levels of withdrawals they are choosing to make look questionably high in many cases."
He pointed out that most of the people questioned had other sources of income that they could rely on in future years, but those who don't have such a backup plan will need to think long and hard about the kind of withdrawals they want to make. "There is currently an engagement gap between people and their pensions," said Tom, which needs to be corrected if pensioners are going to stand the best possible chance of achieving a sustainable income throughout retirement.
"Anyone who is using the pension freedoms needs to have a realistic idea of how long their pension income might need to last for and what level of investment return they can hope to achieve," he said. "They can then work out how much they can withdraw each year without running out of money too early. Even then, the level of withdrawals should be reviewed regularly, something that far too few people are doing."
If you're approaching the time of life when you need to consider such things, just how can you ensure that your pension pot sustains you throughout retirement?
One of the first things you need to do is understand how long your pension income needs to last for, which will depend on life expectancy and whether or not you have any other sources of income (hint: your income may need to last for longer than you think). Remember to check your state pension entitlement to factor this into your calculations, too.
Then you need to think about what you're going to do with your pension savings when the time comes to access it. If you opt for an annuity, you no longer need to worry – your income will be guaranteed for life – but if you're planning on withdrawing funds throughout your retirement, you'll need a suitable investment plan. This can be a tricky undertaking, however, so make sure to get professional financial advice.
Similarly, you'll need to go on from that to decide how much you want to withdraw from your pot each year, which can again be difficult without the right kind of advice. Retirement planning is a complex business so should never be undertaken without the right kind of support; read up on our retirement and pension guides to get an idea of where to start, and contact the Government's Pension Wise service which can help direct you on your next steps.
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