The typical pensioner risks running out of retirement income on average seven years before they die, new figures show.
Millions face the prospect of scraping by purely on the state pension in their final years after using up all of their private pension and Isa savings.
The typical retirement lasts around 20 years yet pensioners have only saved enough money for 13 years of spending, according to a new report from financial planner Money Minder called the “Age of Ruin”.
As I reported last week, pensioners need income of £23,300 a year after tax to enjoy a “moderate” lifestyle, and £37,300 a year to be “comfortable”.
These calculations, made by the Pensions and Lifetime Savings Association, suggest that £10,600 of this would come from a full new state pension (which as I’ve also pointed out, many don’t get).
This leaves a shortfall of £12,700 a year.
The average pensioner will retire with £190,000 in workplace and personal pensions and other savings (although many will have much, much less).
If they took 25 percent tax-free cash at the outset, they would be left with £142,500, Money Minder says. If they used this to create an after tax income of £12,700 the money would only last to age 78.
This is seven years less than current life expectancy, which for a 65-year-old is age 85. It leaves the average retiree seven years short.
Running out of money in retirement was less of a problem in the days when pensioners were forced to buy an annuity paying a guaranteed income for life.
That obligation was scrapped in 2015’s pension freedom reforms, which liberated the over-55s to draw cash from their pension pots when they chose.
Today, the majority leave their money invested in drawdown at retirement, in the hope of benefiting from stock market growth.
That’s what I plan to do.
Drawdown is far more flexible than buying an annuity but it’s also riskier. Volatile stock markets have hit pension values while the cost-of-living crisis has forced many Britons to dig deeper into their depleted pots.
Life expectancy has dipped slightly but many will still live for longer in retirement than they expect, and their savings won’t last the course.
Money Minder managing director Ray Black said pensioners run the risk of running out of money altogether with years to go. “They will still have the state pension but that’s nowhere near enough to maintain the same standard of living.”
As well as everyday spending, pensioners will want to pay for home improvements, cars and holidays after retirement, too, Black said, putting more pressure on their savings.
He urged everyone to regularly review their pensions and investments to see whether they are putting aside enough.
Many will fall dangerously short.
READ MORE: Basic state pension fury as millions get £2,500 less and gap gets worse
Drawdown can help your money grow but if stock markets fall – as they did last year – its value could dramatically shrink instead.
Stephen Lowe, group communications director at retirement specialist Just Group, said that as a rule of thumb, savers can withdraw four percent of their pension each year without depleting it. “Worryingly, almost half are drawing double that amount.”
Britons have now withdrawn more than £60billion from their pensions since 2015, at a rate of around £10billion a year.
Tom Selby, head of retirement policy at AJ Bell, said early access increases the risk of running out of money in retirement. “You will also miss out on all future investment growth on the money you withdraw.”
Anyone planning to increase their withdrawals to maintain their spending power as inflation soars should calculate whether that is sustainable in the long run.
Selby points out that since 2016, savers have been able to pass on unused pension free of inheritance tax if they die. “Pensions are a good way of passing on wealth to your loved ones so think twice before spending all the money.”
If the Money Minder report is correct, millions will deplete their savings long before then.
I warned years ago that pension freedom reforms would backfire, but everyone loved them at first, as the over-55s raced to cash in their pots.
Given the speed that my 50-something friends are raiding their pensions, despite still having 30 years of life ahead of them, we’re already well on the way to the Age of Ruin.
