Be careful with your pensions freedom

Savers are using the pensions freedom rules to dip into their retirement funds at an alarming rate, says David Prosser.

913_MW_P31_Pensions

Leap free, but take precautions

The average amount that savers with income-drawdown plans withdrew from their pensions rose sharply last year, prompting new concerns that people could run out of money in retirement. The average saver with an income-drawdown plan took out 5.9% of their pension fund during the 2017-2018 financial year, up from 4.7% in the previous 12 months, says the Financial Conduct Authority (FCA), the City regulator.

The numbers are worrying because financial advisers have repeatedly warned that people taking advantage of the pensions-freedom reforms of 2015 could end up jeopardising their financial security later in life. The reforms have made it much simpler to withdraw income directly from a pension fund in retirement, rather than using the fund to buy an annuity contract from an insurer. But people who choose this route must make sure they manage their withdrawals with care, so their pension funds don't run out too soon. This requires discipline about how much is taken out each year, as well as careful ongoing investment of the remainder.

Note that the regulator's data do not provide a full picture, as they do not include statistics on how many people making withdrawals actually have other savings to fall back on. Some people may consciously be withdrawing large sums from one pension scheme in the knowledge they have another scheme where they have yet to begin drawing benefits, or they may have other forms of savings.

Make it last

However, the FCA has repeatedly said it is worried many people don't have a good understanding of how to manage their savings to ensure they have enough money to last for their whole retirement. The regulator's research suggests that a third of those going into income drawdown, once considered a complex product suitable only for wealthy and sophisticated savers, don't take independent financial advice before setting up their plans.

In practice, the amount it's possible to withdraw from a pension fund without running it down to zero too quickly will depend on the investment returns the remaining savings generate over time. But given that returns are not guaranteed and no one knows how long their retirement will last it's best to be cautious. Many believe that savers withdrawing more than 4% of the fund every year can't be confident that their money will outlive them. If investment returns disappoint in the years ahead, or savers have chosen to invest in low-risk assets such as cash, that figure could be even lower.

Recommended

How to get the best deal from your pension drawdown
Pensions

How to get the best deal from your pension drawdown

If you're thinking of taking out a pension drawdown plan on reaching retirement, don't just rely on the Money Advice Service’s price-comparison tool.
23 Feb 2021
The scandal brewing in pension transfers
Pensions

The scandal brewing in pension transfers

Many savers who switched their retirement fund out of final-salary pension schemes received poor advice. But those caught out have limited recourse to…
2 Feb 2021
Look beyond the default options if you want to start taking income from your pension
Pensions

Look beyond the default options if you want to start taking income from your pension

Regulators have come up with four ready-made plans for people who want to start taking an income from their pension fund – but you should still seek h…
26 Jan 2021
Suspending your pension contributions? Remember the magic of compounding
Pensions

Suspending your pension contributions? Remember the magic of compounding

Think very carefully before suspending your pension contributions, or you will miss out on compound interest – the “eighth wonder of the world”.
12 Jan 2021

Most Popular

A beginner’s guide to bitcoin: the technical genius behind bitcoin and the blockchain – and how it all works
Bitcoin

A beginner’s guide to bitcoin: the technical genius behind bitcoin and the blockchain – and how it all works

In the second in his series on bitcoin, Dominic Frisby looks at the blockchain – bitcoin’s unique underlying architecture – and what makes it and the …
2 Mar 2021
A beginner’s guide to bitcoin: how to buy bitcoin
Bitcoin

A beginner’s guide to bitcoin: how to buy bitcoin

For the novice, buying bitcoin can be a daunting prospect. Here, Dominic Frisby outlines the process from start to finish.
3 Mar 2021
Why gold has been such a bad investment so far this year
Gold

Why gold has been such a bad investment so far this year

Gold – the ultimate safe haven investment – is proving anything but safe. It’s lost over $200 an ounce since its high at the start of the year. Domini…
3 Mar 2021