Thousands of savers risk running out of money in retirement if they withdraw 8 per cent or more of their pension each year, according to analysis by Standard Life.
The analysis shows that a £100,000 pension pot can last a full retirement if £4,000 a year is withdrawn and returns are 5 per cent or more. It would hold its value at a 5 per cent return and would rise to over £300,000 at an 8 per cent return. Meanwhile, with a 2 per cent return, the analysis suggests the pot would run out after around 29 years.
But withdrawing £8,000 a year puts the pot under much greater strain and even an 8 per cent annual growth would see the pot deplete in 30 years’ time. Additionally, at a 5 per cent return it runs out in 17 to 18 years and at 2 per cent it is completely gone in just 15 years.
The warning follows FCA data which shows that over 225,000 people withdrew from their pensions at rates of 8 per cent or more in 2023–24. Over 50,000 people with pension pots worth between £50,000 and £99,000 withdrew at 8 per cent between 2023-24. Additionally, 40,000 people with pots of £100,000 to £249,000 also withdraw at the same level.
These findings come ahead of the Pension Scheme Bill, which is expected to legislate default retirement income solutions to reduce risks from unsustainable withdrawals.
Standard Life head of annuities Pete Cowell says: “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 in 2015 may now be taking stock of what remains, many current retirees are also likely to have the safety net of a DB pension to fall back on.
“However, with DB 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. 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.
“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.”
