Going out too fast
There are early signs that some pension savers risk exhausting their funds in retirement.
The Association of British Insurers (ABI) has published statistics for the first full year since the Freedom and Choice pension reforms were introduced, covering the period from April 2015 to April 20161.
While the figures show that the majority of savers are taking a sensible approach, there are signs that a minority may be withdrawing too much from their pension fund. Moreover, that minority is doing so at rates that would see their money run out in a decade or less, if they are reliant on it as their main source of income.
During the last quarter, 4% of pots had 10% or more withdrawn, with many other savers taking their whole fund in one go. However, the data is unable to reveal whether these savers may have multiple pots or other sources of regular income.
“There may well be other factors at play here, such as people having other retirement income, for instance final salary pensions or multiple pots,” says Yvonne Braun, the ABI’s Director of Policy. “But this is a warning sign that requires further investigation. We need a full picture of these [individuals’] circumstances and income, which is something we urge regulators and the government to work with all stakeholders to examine.”
Peaking too early
Responding to the ABI’s statistics, Ian Price, Divisional Director at St. James’s Place, said that he worries for the minority of people who squander their hard-earned pension savings early in retirement.
“Those taking 10% or more regularly from their pension pot will likely run out of money,” says Price. If they’re relying solely on the state pension to see them through their later years, they will have to accept that their standard of living is going to drop significantly.”
The most recent quarter also shows a slight drop in the sales of guaranteed income (annuity) products, with £950 million invested, compared to £1.1 billion in the previous quarter. Sales of flexible income (drawdown) products have remained consistent, with £1.48 billion invested, compared to £1.49 billion the previous quarter.
The ABI said that the fall in annuity sales in the last quarter probably reflected ongoing pressure on annuity rates. Those rates have since been pushed down further by the Bank of England’s August decision to cut interest rates to a new all-time low, and to introduce further quantitative easing measures.
Retirees opting for drawdown pensions should seek professional help to calculate how much money they can withdraw each year without running out. While selecting a balanced and well-diversified investment portfolio is critical, knowing how much money to take from a drawdown policy is arguably of greater importance.
“The amount people should take very much depends on their age, the type of investments they hold, and many other factors,” says Ian Price.
“It’s vitally important that people seek the advice of an expert who can review the appropriate rate of withdrawal each year, and alert them if they are taking too much. They can also advise on how to respond if the market falls.”
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
1ABI News Release - full year of pension freedom data (15/8/2016)