‘Cash today, poverty tomorrow’ : do you risk running out of money in retirement?
Saving for retirement has always been a question of balancing instant gratification today with safeguarding the financial future of tomorrow. Of course we could all easily spend everything we earn without a thought for how we will support ourselves when we are no longer working but the savvy amongst us know that saving is key to having choices in later life and living out our post-employment days in financial comfort.
It’s one thing not saving in the first place but a new phenomenon seems to be emerging in the current pensions landscape: savers drawing down on their pensions too early and leaving themselves at risk of running out of money in retirement.
As fewer and fewer people benefit from final salary pensions which provide a guaranteed income throughout retirement increasing numbers of us are having to take care of our own arrangements. That means that we not only have to decide how much and when to save but we are free to choose how and when we access and spend our retirement savings. Which can be dangerous!
Starting in 2015 when the UK introduced pension freedoms enabling over 55s to dip into their pension pots, then Pensions Minister, Steve Webb famously quipped that people were free to blow their retirement savings on a Lamborghini if they so desired. While I don’t imagine that too many fifty somethings do use their retirement saving to fulfil the clichéd mid-life dream of owning a luxury car it seems that a lot of people are dipping into their retirement nest eggs early.
Mid-life savers are perhaps more likely to be freeing up cash to fund their children’s university education, slow down on the work front by going part-time or buy a second home. Whatever they are using the money for, industry experts and watchdogs are voicing grave concerns that large withdrawals from pension pots are leaving savers vulnerable to financial hardship later in life.
The Association of British Insurers (ABI) states in a recent report that ‘if the current rate at which many people are typically withdrawing cash from their pension pots continues then future pensioners will be at risk of running out of money in retirement’. According to their figures, in 2018/19 40% of withdrawals were at an annual rate of 8% and over, which is way above the 3.5% rate which is considered by many as a wise rule of thumb.
Of course financial planning is more complicated than that and while some retirees who have other sources of income or a larger pot to plunder may be able to sustain an 8% withdrawal rate, for many others cash today could lead to poverty tomorrow.
The ABI laments what it calls a ‘black hole’ on guidance when it comes to pension freedoms. There is no doubt that investors have been empowered by the changes to pension legislation but there is a lack of information on which to base important and complex financial decisions which could have massive implications down the line.
The best way to plug that black hole is by taking professional financial advice. If you are in your fifties and tempted to start drawing down on your pensions we would advise reviewing your situation with a qualified financial adviser first. It might seem like a good idea to use your retirement savings to fund your child’s university education but you may not fully understand the implications on your financial comfort later on. A professional can help you do that.
Preparing for and navigating your way through retirement is not an easy task. Make it simpler for yourself by getting the right advice to ensure that you avoid making harmful financial decisions now and can look forward to a poverty-free retirement. Contact us now for a mid-life financial MOT.
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