Are you likely to run out of money in retirement?

A £100,000 pension pot could last anything from a lifetime to just 13 years, depending on how much income you take and your level of investment returns, according to analysis by Standard Life.

The aim of any retirement plan is to try not to run out of pension money. While the state pension is a guaranteed income once you’ve reached state pension age, likewise a defined benefit pension, drawing down from a defined contribution pension requires a delicate balance to avoid outliving your limited pot.

The impact of investment returns – higher or lower – can mean the difference of tens of thousands of pounds of retirement income over a decade. And while modest withdrawal rates could see a pension last as long as you do, the worst case scenario of taking out larger amounts coupled with poor investment returns can be a recipe for running out of cash.

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Hundreds of thousands of people could be at risk from a toxic combination of higher withdrawal rates and lower returns, according to FCA data.

Pete Cowell, head of annuities at Standard Life, said: “Pension freedoms gave retirees greater choice and flexibility, but with that freedom came responsibility and considerable financial planning challenges to weigh up.

“While those who accessed their pots for the first time post-pension freedoms in 2015 may now be taking stock of what remains, many current retirees are also likely to have the safety net of a defined benefit pension to fall back on.

“However, with defined benefit pensions in decline, and more people approaching retirement with larger, defined contribution pensions, monitoring the balance between withdrawals and investment returns has never been more critical to avoid outliving a pension.”

How much should I withdraw from my pension?

Two withdrawal scenarios were considered in the research – based on a pension pot of £100,000 – one with a fixed withdrawal of £4,000 per year and a higher one at £8,000 per year.

These are equivalent to the 4% pension rule and 8% of the initial pot respectively and are common withdrawal amounts, according to the Financial Conduct Authority's retirement income data for 2023/24.

The analysis then assessed the impact of different investment returns on the pension pot after 10 years, ranging from a return of 8%, 5% and 2%.

Figures rounded down to three significant figures. Figures assume annual management charge of 0.75% and are not adjusted to account for inflation

Impact after 10 years of withdrawing £4,000 per year

After 10 years, those who withdrew £4,000 of their pension each year would have a pot worth between £141,000 if they secured 8% returns and just £70,400 with 2% returns. This works out at a difference of £70,600, showing how important investment returns are on people's retirement incomes.

Impact after 10 years of withdrawing £8,000 per year

For those who withdrew £8,000 each year, their pot would be worth between £83,900 if they secured 8% returns and just £27,800 with 2% returns. The impact of the additional withdrawals is particularly stark when compared to the lower withdrawal outcomes.

How long will my pension last?

The analysis looked ahead to assess how long the pension pots would last in each of the different scenarios.

Those who took £4,000 each year would not exhaust their pot if it grew by either 5% or 8%, as the investment returns would offset those withdrawals. In the 2% growth scenario, their pension would still last 29 years.

In the higher withdrawal scenario, however, each of the pots would eventually run out, with the pot in the high (8%) return scenario lasting 28 years compared to just 13 years in the low (2%) return equivalent.

Figures assume annual management charge of 0.75% and do not account for inflation

Through these illustrative scenarios, the investment returns are predictable each year, but the reality is that people will experience investment ups and downs while in drawdown which makes predicting how much your pot will be worth all the more difficult.

Inflation will also be a key consideration, as people will need to manage this risk over the long-term to ensure their purchasing power isn’t eroded.

The FCA’s retirement income data shows the risk of running out of money is widespread, given the number of people withdrawing at higher levels.

More than 225,000 individuals made withdrawals at 8% or above in 2023/24, according to the regulator’s figures, highlighting the potential risk of outliving their savings.

Of this number, the figures also show more than 50,000 individuals with pension pots between £50,000 and £99,000 made regular withdrawals of 8% or more in 2023/24.

Some 40,000 individuals with pots between £100,000 and £249,000 were also drawing down at this level.

Cowell said: “There are options for those who want to mitigate investment and longevity risk. Many people are opting to cover their essential living costs with a guaranteed income through a combination of the state pension and an annuity.

“This approach removes many of the unknowns as you know your core living costs will be met while also providing the potential for investment growth on any pension placed in drawdown.

“With the Pension Scheme Bill expected to legislate for default retirement income solutions, we expect to see approaches that blend a combination of income certainty and flexibility become more and more mainstream.”