Pre-retirees are risking “retirement ruin” by overestimating the amount of cash they can withdraw per year, Retirement Advantage has warned.
Research by the firm, which surveyed 1,009 adults aged 50-plus who have a defined contribution pension and are not in retirement, identified 7% as the figure people think they can safely withdraw from a £100,000 pension a year, spending both capital and investment returns, while not running out of money.
Until recently, pensions experts had generally suggested 4% as a ‘safe’ withdrawal rate that, while ensuring sufficient capital and investment returns, would avoid people running out of money. This view has, howeer, been challenged by Morningstar Research, which suggested, based on both historical returns and forward projections, the rate should be closer to 2.5%.
Retirement Advantage pensions technical director Andrew Tully said: “As more people now choose drawdown over an annuity, we have seen the shift of responsibility move to the individual to ensure they manage their retirement fund effectively.
“Our research shows people are well wide of the mark when thinking about rates of withdrawal and, unless they receive financial advice, are running the risk of retirement ruin.”
Tully added, however, he was concerned people were as much at risk from “reckless conservativism” as they were from running out of money, explaining: “Managing your own money in retirement exposes you to the peaks and troughs of investment markets and the effects of ‘pound cost ravaging’, so this needs to be considered alongside how much money to take at any point in time.”
Carried out by YouGov, the research pointed to a wide range of views on what could be a sensible withdrawal strategy for a £100,000 pot – ranging from £1,000 a year (3% of people) to £20,000 (2% of people), while almost a third (29%) said they simply didn’t know.
Women more optimistic
There was little difference in views between age groups, but the research did suggest greater optimism among women as to the amount they could withdraw – an average of £7,506 (7.5%), compared with £6,775 (6.8%) for men.
Tully said: “With such a wide range of views on what people consider a ‘safe’ rate of withdrawal, the best option is to review income needs and the sustainability of taking that level of income every year.”
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