People moving into income-drawdown plans to access their pension funds in retirement risk running out of money too early, warns broker AJ Bell. Almost half of those with drawdown plans are withdrawing 10% of their savings a year, says AJ Bell, in which case the average pension fund of £118,000 could be depleted after just 12 years. Some 57% of survey respondents aged 55 to 59 – those who need their pension funds to last the longest – are withdrawing more than 10% of their fund each year, compared with 43% of 60-to-64 year-olds, and 34% of people aged 65 to 69.
The survey is further evidence that although pensions freedoms are working well for many, the additional flexibility can cause problems for people who don’t manage their money carefully. The issue is compounded by the fact that many people enter into drawdown plans without taking expert financial advice on what is a complicated product – 30% of savers don’t get independent advice before investing in a drawdown scheme, according to the Financial Conduct Authority, the City regulator.
The data does not provide a full picture of people’s vulnerability, as it is possible that some drawdown savers have other retirement assets to fall back on, and are therefore happy to take high levels of income from their plans in the early years of retirement. Nevertheless, the 10% withdrawal rate is in stark contrast to the counsel of financial advisers, many of whom subscribe to the theory developed by American wealth manager William Bengen, which suggests savers who draw down no more than 4% of an investment fund each year have a reasonable chance of their money outliving them.
However, Bengen’s research was published during the 1980s and 1990s, a period of relatively high investment returns; lower returns since then may mean that even a 4% rate is overoptimistic. Withdrawal rates of between 2.5% and 3% are probably now more prudent.
Military partners losing out on entitlements
A scheme aimed at helping 20,000 partners of military personnel serving overseas to secure better state pension benefits has only reached a quarter of those eligible for assistance, prompting criticism of the government’s failure to publicise it. The initiative was meant to ensure that the spouses and civil partners of those in the armed forces don’t miss out on state pension entitlement during periods when their partners are posted overseas, but thousands of those entitled to claim have yet to do so.
The scheme, which was introduced in 2016, entitles spouses and civil partners to claim a national insurance credit for each week in which they were abroad – and therefore not making national insurance contributions (NICs) – because of their partners’ military postings.
A year’s worth of credits effectively entitles someone to a year’s worth of NIC; this is important because to claim the full state pension entitlement on retirement, people must now have 30 years’ worth of NICs – those who fall short get less pension.
At the time of the scheme’s launch, the then Defence Secretary Michael Fallon said it would benefit some 20,000 partners of service personnel. However, a freedom of information request posted by the pension provider Royal London reveals that only 3,765 people have claimed so far, suggesting that more than 16,000 have missed out.
The number of people claiming is so low because little effort had been made to tell those eligible for the credits they need to apply, says Royal London, though the government argues that take-up will increase over time. The scheme remains open and accepts retrospective claims for periods going back to 1975 from both existing partners of military personnel and divorced or widowed partners.
UK’s state pension is worst in the OECD
People in the UK are on target to receive less state pension in retirement than their counterparts in any other major developed economy, according to research from the Organisation for Economic Cooperation and Development (OECD). The average British worker will retire on state pension benefits of just 29% of their pre-retirement income, the OECD said, less than workers in any other country in the group. Low earners will have a replacement rate of 52%, but this is “still very low in OECD comparison” – only Mexico and Poland have lower rates for low earners.
The UK figure compares to an average income replacement rate from state benefits of 63% across the OECD as a whole; in countries such as Italy and the Netherlands, this rises to more than 80%. The UK’s replacement rate puts it just below that of Mexico, where the replacement rate is 30%, followed by Poland and Japan. Top of the table was Turkey, where people can expect to see their retirement income replace 102% of pre-retirement earnings.
However, the UK does have some advantages compared with other OECD countries, with higher numbers of adults in employment and better rates of private pension scheme saving. When you add in the value of private pension benefits, the typical British worker could expect to retire on an income of just over 60% of what they earned prior to retirement, says the report.
Tax tip of the week
Divorcing couples who faced higher stamp duty rates have been granted a reprieve by last month’s Budget, says Sam Meadows in The Daily Telegraph. One of the unintended consequences of last year’s introduction of a 3% surcharge on the purchase of additional homes was that divorcing spouses were sometimes hit by the charge if one remained in the jointly owned family home (sometimes by court order) and the other wanted to buy a new property.
Chancellor Philip Hammond has now moved to put an end to this application of the rule, but the Budget’s wording “suggests a court order may be required in order for the exemption to apply” – informal arrangements between splitting couples may not be enough.