Using the pension freedoms? How to make sure you don’t run out of money in 16 years.

Recent research has revealed the alarming statistic that around a third of people are now likely to run out of money after they retire, which could result in their children’s inheritance being severely diminished or even disappearing completely. This follows the introduction of pension freedoms in 2015, which have allowed people to withdraw large amounts of money from their pension savings at any time.

In the past, pensioners traditionally bought an annuity when they retired in order to provide themselves with a guaranteed income for the rest of their life. However, since pension freedoms were introduced, the sale of annuities has fallen by over 90% from 354,000 in 2008 to just 30,400 in 2016.

Many within the pensions sector are now worried that this significant shift away from annuities may result in thousands of people ending up with no money to live on as they get further into their retirement. As such, many may find themselves needing to turn to other assets, including their homes, in order to raise funds to support themselves – a decision likely to have a significant impact on the inheritances they leave behind.

The research looked at over 5,000 retirement scenarios, comparing the performance of drawdown against an annuity purchase in conjunction with a wide range of investment outcomes. The results showed that 30% of drawdown cases left the individual with no money before they died, suggesting that while opting for drawdown may be suitable for some people, it can pose a serious financial risk for others.

One scenario considered a man aged 65 with £100,000 available to invest. Purchasing an annuity would pay him £5,500 a year until his death. A low-risk drawdown investment, which placed 90% of his money in cautious assets including cash and low-risk bonds and the remaining 10% in higher-risk options such as shares, would only deliver a return of between 0.9% and 1.5% annually. As such, the man’s money would run out when he was around 84 or 85. As around 60% of men are still alive in their mid 80s, this would potentially leave him with years of retirement without any funds available.

A higher risk investment, where 90% of the money goes into shares and 10% in cash and bonds, could result in an average return of 5.5% and money until the man turns 98. However, this scenario also poses the possibility of him winding up with a return of zero, which would result in the money running out after just 16 years, when the man is 81 years old. These latest findings highlight the importance of sensible planning and saving for your later years to suit your particular situation. If you have any questions around this topic, please feel free to get in touch with us directly.

Posted In : Savings, Pensions, Retirement, Financial Planning