PERSONAL ACCOUNT

The stats look scary, but will we really run out of pension money?

Yet more evidence emerged this week suggesting that retirees are being less than prudent with their pensions. Younger “pensioners” in particular – those in their late 50s or early 60s – are drawing too much, too soon, according to data from Royal London, the mutual insurer and pension provider.

We are now two years into the era of “pension freedoms”. This radical shake-up of pension rules, you will recall, enabled those over 55 to access pension savings and spend the cash (subject to tax) as they wished. It came into force in April 2015.

While the previous regime had allowed wealthier savers to more or less avoid the purchase of an annuity, this change in rules widened that ability out to everyone. Savers and pension firms and indeed employers are all still adjusting to the new landscape. There remains an anxiety that savers will blow the cash too soon. The Government will benefit, cynics claim, because the move will bring forward spending and thus bolster tax revenues. But where will it leave retirees? Will they shuffle into later life with nothing but the state pension?

I don’t think so. As I’ve written before, there’s little doubt that the state pension will become more important as a source of retirement income as a younger generation enters retirement with less in the way of company pension benefits. The decline in “gold-plated”, salary-linked pensions has made that almost inevitable. An older generation might sniff at a salary-linked pension promising to pay, say, £5,000 per year from a retirement age of 65. But the market values that entitlement at anything up to £200,000. Awareness of these astonishing figures is growing. In tomorrow’s Sunday

Telegraph Money, for instance, we write about the case of a man who swapped an entitlement to an annual income of under £40,000 for a one-off sum of well over £1m. Good idea? That’s probably best answered case-by-case. But what it shows is the value of income.

And here, in our story on page 1, we write about a reader whose selfinvested portfolio of £500,000 generates an income of just £16,000. Again the point is that income is dear.

People have always understood that. If anything, our era of terrifyingly low investment returns is giving the message a new emphasis.

What concrete evidence, if any, exists to show that savers are burning through their pension pots?

Little that I can find. Take Royal London’s latest research. The insurer looked at its customers who are “in drawdown” – which is where income is drawn from a portfolio of investments held within a pension, sometimes called a Sipp (self-invested personal pension).

Well over half of these customers are aged between 60 and 69. The average size of their pension pot is around £95,000. But they are drawing an average income of more than 6pc of their pension pot per year.

With those stats in mind, look at the graph, left, which shows how long an invested pension pot might last given two different rates of withdrawal (3.5pc and 5.5pc) over a range of periods. The figures are based on real, historic investment returns. They take into account annual costs of 1pc.

It would seem that the majority of Royal London’s customers are taking a big risk. There is a very good chance of someone aged 60 living another 30 years. Yet according to that graph, if he or she continues drawing out an income of 5.5pc, there is just a 37pc chance that the pension pot will last the course.

I question the conclusion that these people are plunging into trouble, however. As Royal London itself admits, they have all taken financial advice. Many may be acting prudently by taking these withdrawals because, perhaps, they have other income – or the expectation of other income.

Companies like Royal London are absolutely right to raise the issue. But it’s too early to say that there’s a problem in the making.

‘Income is dear. That fact is now better known’