Flexible ways to make your savings fund last a lifetime

BRITONS are taking full advantage of their freedom to make flexible pension withdrawals after they turn 55, but there is a danger of taking too much, too soon. More than threequarters of retirees have withdrawn money from their pension before retirement age, taking £47,000 on average, new data from Scottish Widows shows.

Dipping into your pension can help clear debts, support family and boost your spending power, but may also store up problems for later life.

At 55, your pension may still have to last for another 30 years or more, so plan those withdrawals carefully.

PLAN

Saving a big enough pension to see you through is tough but working out how to spend it is even tougher.

Stephen Lowe, director at retirement specialist Just Group, likens it to flying a plane when you don’t know the weather conditions or final destination. “You have no idea how long you will live, how stock markets will perform or how inflation will erode your spending power.”

It was easier in the days of final salary schemes and guaranteed annuities, when your pension income would last as long as you did.

Most pensions are now invested in the stock market, with all the risk on your shoulders, Lowe said. “Money taken early will not be available later. Economic volatility can knock the most sensible plan off course.”

At least the state pension is guaranteed, and Lowe suggested using this along with any annuity or defined benefit pension to cover essential spending. “Keep the rest for treats, luxuries, holidays and gifts, or simply leave it to grow.”

While there are risks in withdrawing too much, there is a danger in spending too little. “Your pension was money you saved to be comfortable in retirement. Don’t scrimp and hoard, unless you really have to.”

SUMS

People tend to live longer than they expect, so assume you will live to 90 or 100, said Pensionbee’s director of public affairs, Becky O’connor: “A crude and cautious approach would be to divide your pot size, minus the 25 per cent tax-free lump sum, by the number of years your retirement could be.” So if your pension is worth £100,000, and you take £25,000 tax-free, that leaves £75,000. If you are 65 and reckon you will last to 85, you could safely draw £3,750 a year.

In practice, you could almost certainly take more. “Pension left in drawdown should continue to grow, so you should do better than this conservative estimate.”

Some use the ‘4 per cent rule’, also known as the safe withdrawal rate. This financial planning rule of thumb suggests if you draw this percentage of your pension each year, your money will last for 30 years or more.

High fees can erode a pension, so check you are paying no more than 1 per cent a year, O’connor said.

Today, most people leave their pension invested and take lump sums or income via drawdown, although annuity sales have picked up as interest rates rise.a combination of the two may work best, O’connor added. Use drawdown in early retirement to help your pension grow, then buy an annuity when you are older.you will get more income as your life expectancy is lower.

REVIEW

Andrew Tully, technical services director at Nucleus Financial, said if you want your drawdown savings to last your lifetime then check them regularly, at least once a year.

Do not overdo it, though. Pension values will rise and fall with the stock market, and obsessively checking its value could trigger unnecessary panic when shares fall, or excitement when they rise. If possible, resist making withdrawals after a crash, as this will crystallise your losses and lock you out of the recovery. “Take income from funds which are less volatile, or keep a small amount in cash and withdraw income from that.”

You do not need to take all of your tax-free cash in one go but can draw it over a number of years, said Tully: “If your pot grows this will boost your tax-free sum.”

‘Your pension was for you to be comfortable in retirement. Don’t scrimp or hoard, unless you have to’

TAX

It helps to have other sources of income such as a part-time job, savings, Isas, Premium Bonds or even a buy-to-let property. Many people prefer to use these first, as they may be subject to inheritance tax if you die, whereas unused pension isn’t.

Tully said make sure you will qualify for the maximum state pension, too, and either claim National Insurance credits if eligible or make voluntary contributions if heading for a shortfall.

If you do run out of pension, check out what state benefits are available. Pension credit tops up incomes of the poorest, yet three in 10 of those eligible fail to claim. Check eligibility for Counciltax Reduction.those with health problems may be able to claim Attendance Allowance. Citizens Advice and Age UK can help.

Homeowners may be able raise cash via an equity release lifetime mortgage or downsizing to a smaller property. Both options have pros and cons and are not for everybody.

Consider taking independent financial advice. Over 50s should book a free appointment with impartial government guidance service Pension Wise.

Pension freedoms are popular but need to be handled carefully.