Ten million risk outliving their pension savings

Millions of workers will manage their own retirement but many don’t know how to avoid running out of money. Jessica Beard reports

Almost 10 million people in Britain do not know how to avoid running out of money in retirement and risk burning through their savings more than a decade too soon.

Pension pots no longer deliver as much income as they did 10 years ago, largely because yields on government bonds have reached record lows. This means that an investor who takes 5pc instead of 4pc from their retirement pot each year could burn through their savings long before their death. Poor investment choices or high fees have also cost pension pots tens of thousands of pounds.

A survey conducted by LV, the pensions group, found that 34pc of savers, or 9.9 million people, admitted to not knowing how to ensure they would not run out of money in retirement. A similar number said they did not realise that stock market falls could affect their pension plans.

In spite of this, 8.3 million adults said they planned to manage their retirement savings and investment strategy themselves. Fewer than a third of British savers planned to get financial advice about how to take an income from their pensions. Nearly half of people who did not take advice said it was because they were confident in their ability to make their own financial decisions. A further 27pc said it was because they didn’t think the advice industry offered good value for money.

Chris Adams*, 46, from Kent, said that after a long search for professional advice he was most likely to go it alone as he found most independent financial advisers to be “clueless guessers” who “didn’t seem too smart”.

Mr Adams, who has made more than £1m from his own business, said he had wanted advice on how to invest his savings for his retirement but had been put off. “It’s daunting and confusing handing over control of my very hard-earned cash and I’m mistrusting of advisers. I have found them quite unsuccessful in running businesses, and they have a reputation for selling poor products in the past to line their own pockets,” he said.

He said he feared he would pay a £ 3,000 one- off charge or a similar annual fee for simple advice. “I need a doctor of finance who can look under the bonnet, not a quack who takes the money and shoves me out of the expensive revolving door into Mayfair,” he said.

Clive Bolton of LV said a DIY approach to retirement was fraught with risk as people could end up making overly emotional decisions or buy the wrong investments.

Andrew Tully of Canada Life, a rival firm, said there were “huge bear traps” that pensioners needed to avoid. These included paying more tax than necessary on withdrawals, falling prey to conmen and making poor investment choices.

He said: “Retirement can be a minefield of options, so you should think about getting some guidance. Book a free appointment with the Government’s Pension Wise service, which will talk you through the options without any sales pressure.”

Tom Selby of AJ Bell, the fund shop, said one big mistake to avoid was to withdraw all the money from your pension as soon as you were allowed to. “It is all too common for savers to whip all of their pension out at the earliest opportunity. This often comes from a distrust of pensions or a desire to get the money as quickly as possible,” he said. Those who take the entire savings pot in one go risk paying more tax than necessary, as three quarters would be taxed as income.

Even drawing the full 25pc tax-free cash from a pension could be the “worst financial decision” someone can make, costing them thousands of pounds in retirement, according to Matthew Sinclair of Wealth of Advice, a financial adviser. From the age of 55 savers can withdraw a quarter of their pension without paying any tax. But doing so can be costly unless the money is used for a specific purpose as it could continue to grow tax- free inside the pension.

Another mistake is to ignore big falls in your investments. Mr Selby said: “If your investments hit trouble – something many people experienced in 2020 – then a previously sustainable retirement income strategy could become unsustainable.”

As a rule of thumb, a healthy 65-year-old should be able to withdraw between 3pc and 4pc of their pension pot a year and be confident that it will last them through retirement.

Keeping pension money in cash over the long-term is another way to erode savings. Inflation can wipe more than a decade off the time you can survive off your pension if it is all kept in cash.

“Holding some cash might be necessary. But investing everything in cash – or withdrawing your money from a pension, paying unnecessary tax, and putting the money in a bank account that pays little or no interest – risks significant damage over the course of your retirement,” Mr Selby added.

‘Retirement can be a minefield. Savers should book a free appointment with Pension Wise’