DON’T MISS YOUR WEEKLY PERSONAL FINANCE TIPS

HALF of all elderly savers who take advantage of forthcoming pension freedoms to draw their pot as cash will blow most if not all their savings before they die.

That is the stark warning facing retired people in the run- up to Chancellor George Osborne’s radical pensions overhaul, which comes into force at the start of the new tax year on April 6.

New rules will allow the over- 55s to use their pension as a cash machine, rather than being forced into buying an annuity.

This is likely to spark a surge in demand for income drawdown plans that allow you to leave your pension invested in the hope that it will grow, while drawing down cash when you need it.

Annuity sales have slumped since the proposals were announced in the Budget last March, as retired people wait to use their new freedoms.

However, many do not realise that income drawdown is far more risky.

While an annuity guarantees you an income that will last as long as you live, there is no such guarantee with income drawdown.

Retirement specialist MGM Advantage has warned that people who use drawdown to match the income they would have got from an annuity have a 50: 50 chance of running out of money before they die.

Its figures suggest that a 65- yearold man with a £ 100,000 pension pot could generate an income of around £ 6,000 a year from an annuity, which would last for his entire lifetime.

If he took the same income using drawdown, the money would run out completely by age 92, even assuming five per cent annual investment return after charges.

Andrew Tully, pensions technical director at MGM Advantage, said that thanks to rising life expectancy, half of all 65- year- olds will live until that age.

“While many people may think they will not live long enough to worry about their money pot running out, the statistics show this is not true.

“Healthy people approaching the age of 65 have a 70 per cent chance of being alive at the age of 86, which is the average life expectancy, and a 50 per cent chance of living to 92.”

Tully said that pensioners who abandon annuities for income drawdown are effectively “flipping a coin to find out if they will run out of money in retirement”.

And if they draw down more cash from the pot, they could empty it even sooner.

He explained that pensioners must realise their money could run out and recommends a combination of annuity and income drawdown.

“You could take out an annuity to give you a sustainable income that is guaranteed to pay the bills, no matter how long you live, and then, if you have cash left over, use drawdown or other options.”

Tully said pensioners who do not take advice risk making a mistake that could easily blight the final years of their life.