Most people would be better off drawing down money from their pension pot when they retire rather than annuitising, and those over £100,000 should almost always do so, according to research from Cass Business School, City University, London.
The research finds that with careful management, moderate sized pension pots of £100,000 or more should not run out until at least the age of 80 or even older. Using a flexible rather than fixed drawdown approach can reduce the risk of running out still further.
The paper, Pension Pots and How to Survive Them, by Cass Faculty of Actuarial Science Academics Les Mayhew, David Smith and Douglas Wright, was launched today at the International Longevity Centre UK in London.
The research recommends having a full financial ‘health check’ at the point of decision, and if drawdown is decided upon then the research recommends seeking regular independent professional advice thereafter.
The researchers say this pro-drawdown approach is appropriate because annuity rates are at an historic low and the forecast is for this to continue, protection against inflation is expensive meaning most people choose a level annuity whose value erodes with time and may be worth little at old ages.
The research argues people with small pensions pots will only receive a small annuity anyway and could also find that their benefit entitlement is reduced if their only other income is their state pension. People with large pension pots should always draw down, the report says.
Those with intermediate pots of around £100,000 have the most difficult decisions to make, as they must consider factors such as equity release or downsizing, tax planning and buying extra state pension with the tax-free lump sum.
Lead author, Professor of Statistics, Les Mayhew says: “The new freedoms are exciting but need not be especially risky. If simple rules are followed people should benefit from the greater flexibility, whether it is making intergenerational transfers or simply better enjoying their retirement. It is important that your pot is invested appropriately according to your preferred level of risk and is also managed professionally.”