44pc on course to drain pots in 12 years

Fears that pension freedoms may result in retirees running out of cash have been heightened by research showing almost half of drawdown savers are withdrawing more than 10 per cent of their pension savings each year.

ComRes research for sipp provider AJ Bell shows 44 per cent of drawdown savers are withdrawing 10 per cent a year, a rate that is expected to completely erode their pot within 12 years. The vast majority – 77 per cent – are drawing more than the 4 per cent a year that is seen as an industry benchmark for sustainable withdrawals.

Younger savers are withdrawing pension at a higher rate than older savers, with 57 per cent of people in the 55-59 age bracket withdrawing more than 10 per cent of their fund each year, compared to 43 per cent of people in the 60-64 age bracket and 34 per cent of those aged 65-69.
The research suggests that a lack of understanding of life expectancy – younger drawdown savers are considerably more likely to underestimate their longevity than older ones – may be prompting the trend. The report shows 51 per cent of 55-59 year olds underestimated how long their income would be needed for, compared to 47 per cent for the 60-64 bracket, 23 per cent for the 65-69 group and 25 per cent for 70-74 year-olds.

The research surveyed 250 British adults aged over 55 who have flexibly accessed their pension since April 2015.  The average level of total pension savings was £118,000.

The table shows the fund value each year based on 6% and 10% withdrawals of the initial fund value of

AJ Bell senior analyst Tom Selby says: “It seems that people using the pension freedoms are playing a life expectancy guessing game and are often coming up short.

“The evidence from our research suggests many people might be severely underestimating how long their pension income will need to last for and as a result the levels of withdrawals they are choosing to make look questionably high in many cases.

“It is important to note that nearly all of the people we questioned have other sources of income so they might be relying on these to supplement their pension income in future years. So we shouldn’t hit the panic button just yet.  We are less than three years into the pension freedoms and so people are still getting used to the increased flexibility they have.  This may calm down as flexible drawdown becomes the norm.

“However, the data does suggest that there is currently an engagement gap between people and their pensions and this is something that needs to be closely monitored as we move towards the third anniversary of the new rules next year.  There is a clear need to understand the behaviour of people using the pension freedoms and ensure they have all the information, guidance and advice they need to make informed decisions.

“Anyone who is using the pension freedoms needs to have a realistic idea of how long their pension income might need to last for and what level of investment return they can hope to achieve.  They can then work out how much they can withdraw each year without running out of money too early.

“Even then, the level of withdrawals should be reviewed regularly, something that far too few people are doing.”