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Lieke Braadbaart

Online Writer
Published: 20/04/2018
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When the pension freedoms were introduced in April 2015, many worried about the prospect of retirees taking out too much too fast and ending up without an income in their later life. Now, research from Prudential has found that these fears were largely unfounded, as most pensioners have remained careful with their pots.

Pension caution

The pension freedoms allow savers to withdraw funds from their pension pots without limit, which could lead to all sorts of trouble if not thought through. Luckily, only one in 10 who have stopped work since the freedoms were introduced admitted to overspending.

Additionally, 79% said that they have used withdrawn lump sums wisely, with a quarter using their pension funds to pay off all their debts and only 16% helping their children with a home deposit, while 8% have helped children and grandkids with education costs. So, pensioners haven't been spending too much on their offspring, or other costs they can't afford. Meanwhile, only 6% said that they initially withdrew more than the tax-free 25% cash lump sum.

What's more, 50% of survey respondents said they've set a budget for spending, showing that even after taking out money they're still cautious. That said, budgeting becomes less likely the further into retirement respondents are, with just 36% of those who retired five to 10 years ago setting a budget, and only 24% of those who retired 10 or more years ago having one.

Still some worries

Despite the initial caution, 24% said they've found it hard to live just on their retirement income for the past three years, while 9% worried that taking a lump sum has reduced their retirement income overall. Indeed, according to Prudential, taking too much money out early in retirement and poor investment growth are the main causes that can lead to pensioners running out of money.

The latter is only a concern for people who choose drawdown over an annuity. Then again, taking too much out of your pension at the start could see you offered a lower annuity income, which might make drawdown more appealing despite the greater risk. However, a 65-year-old with a £150,000 pot who takes an income of £13,000 per year will have an income until the age of 83 with 5% annual growth, but will run out of money by age 78 with 1% growth. So, think carefully about your options.

"The decision to trust people with their own money has proved the right one," said Vince Smith-Hughes, a retirement income expert at Prudential. "The big challenge for people retiring is making sure that their money lasts the rest of their life, [so] retired people need a clear idea of how much money they will need and how long their retirement fund is likely to last. The best way for most people to do that is consult a financial adviser."

What next?

Even if you don't think an annuity is for you, it can't hurt to talk to an expert about your situation – preferably before you take money out of your pension

Those that are still quite far away from stopping working would do well to add to their pension pots as often as possible. For additional long-term savings, there's also the lifetime ISA or regular stocks & shares ISAs to consider.


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