If you’re choosing to access your pension flexibly, one of the risks is that you could take too much from your pension too soon. Guy Ovenden, Chartered Financial Planner at Pembroke Financial Services, said: “Your pension is likely needed to provide an income for several decades and evidence suggests that many retirees could find their pensions will run out during their lifetime.
“Since 2015, retirees have been able to access their pension flexibly through drawdown. This means you withdraw an income when it suits you, with the rest usually remaining invested. It’s proved popular and allows you to create an income that suits your retirement lifestyle. However, it also means you need to consider things like what a sustainable income is.”
Why the 4% rule may no longer be suitable
Guy added: “In the past, a common rule of thumb was that you should take no more than 4% of your pension each year to ensure that it lasts throughout retirement. However, sticking to this rule today could mean you’re more likely to run out of money.”
Many factors play a role in why this ‘rule’ may no longer apply, including the following three examples.
- Market conditions have changed. Over the last decade, interest rates have been low, falling even further in response to the economic challenges of Covid-19 this year. Coupled with market volatility, it means your pension investments may no longer be delivering the performance previously expected. As a result, a lower ‘rule’ of 3% or even less is more likely to be sustainable given current market conditions.
- People are spending more time in retirement. While the age we can access our pension and State Pension is gradually rising, longevity has increased at a faster pace. Those retiring today are likely to enjoy a longer retirement than previous generations. Pension savings now need to stretch further to ensure long-term financial security.
- Retirement spending often isn’t linear. How we retire and our income throughout retirement is changing too. In the past, retirees gave up work on a set date and income needs would remain consistent throughout retirement. Now, you may decide that a phased retirement is for you, go back to work in some way later in life or have plans that mean income needs fluctuate. This is good news for creating a lifestyle that suits you, but it makes it far more difficult to set out a ‘rule’ that applies to the majority of retirees.
42% of pensions accessed at ‘unsustainable’ levels
It’s difficult to state when pension withdrawals would be unsustainable without knowing the individual circumstances of each person. However, the latest data on retirement income from the Financial Conduct Authority (FCA), covering 2019/20, suggests more than four in ten people could face financial challenges in their later years.
Some 42% are taking more than 8% from their pension each year, an increase of 40% from the previous period. Withdrawals at this level lead to a high risk that pension savings will run out during your lifetime.
The figures show high withdrawal levels are more likely to occur when accessing smaller pension pots. Some 67% of those using an 8% withdrawal rate had a pension worth between £10,000 and £99,000. This compares to 24% with a pension worth more than £100,000. Those with pensions worth more than £250,000 tended to be more cautious and take smaller withdrawals.
Guy noted: “Of course, the figures alone fail to show the full picture. Those taking larger levels from smaller pensions may also hold several other pensions and are using a strategy to use each pot in turn. However, the figures do indicate that many retirees could be at risk of running out of money sooner than expected.”
The importance of understanding your retirement and income
Decisions made in early retirement can have a long-lasting impact. Taking too much from your pension in the early years of retirement can mean investment returns fall significantly and fail to provide an adequate income later in life, for instance.
Guy said: “As you approach retirement, assessing the assets you have to create an income, including pensions, and your plans are crucial. While ‘rules’ can give you a general idea, taking the time to understand your desired lifestyle and assets can mean you’re in a position to create a plan that works for you. What works for one person can be very different from another, even if their circumstances appear similar on the surface.
“Working with a financial planner allows you to get the most out of your retirement, safe in the knowledge that your latter years have been considered.”
Talk to us to understand your pension and retirement income
At the point of retirement, you need to make many decisions, including how and when you’ll access your pension. Longevity and sustainable withdrawals are just one aspect you need to consider. If you’re already retired or nearing retirement, we’re here to help you. We’ll work with you to understand your retirement goals and how your pension and other assets can be used to achieve them with your whole retirement in mind. Please contact us to arrange a meeting.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.