A recent report from the FCA, published by Professional Adviser, has confirmed a “worrying trend” among retirees, with 43% taking withdrawals of 8% annually.
Figures indicate that more than 160,000 people took annual withdrawals exceeding 8% between April 2020 and March 2021. And, while the report doesn’t confirm whether those withdrawing this amount had other pensions to fall back on, the unsustainability of such high annual withdrawals is still a cause for concern.
Keep reading to find out why high percentage withdrawals could be a bad idea for you, and how Boolers can help you to better manage your retirement income.
3 important things to consider when drawing an income from your pension
1. Life expectancy and potential costs in later life
Back in February 2021, we looked at four reasons why you might opt to take your pension as a last resort and reported that UK retirees could expect to outlive their pension savings, some by more than a decade.
The Office for National Statistics (ONS) confirms current life expectancy in the UK of almost 80 years for males and over 83 for females. This means that you could live for 30 or even 40 forty years in retirement. But will your retirement fund last that long?
Budgeting for a 30- or 40-year retirement isn’t easy. The amounts you’ll need won’t be uniform. You might find you spend more in the early, “active” years of your retirement, for example, but there could be hidden costs further into retirement too.
One of these costs is later-life care. You’ll need to ensure that your pension fund provides a comfortable lifestyle early in your retirement while leaving some funds spare to cover potential care costs. You might want to leave some money behind as an inheritance too.
A recent report in the Telegraph suggests that millions of Brits could retire with a pension too small to provide a comfortable retirement and fund care in later life. The article suggests that the shortfall – or “black hole” – could total around £150,000.
You’ll need to think carefully about the amount you withdraw each year, balancing your retirement needs now with your altered needs three or four decades from now.
2. The impact of stock market fluctuations
You might be sure that your regular withdrawals are sustainable, but even with careful budgeting, you’ll need to remember that stock market fluctuations can have an impact on your retirement fund.
When the stock market is low, you’ll need to sell more units to provide the same regular income. This can diminish your fund much more quickly than you realise and so keeping a constant watch on your invested fund is crucial.
Stock market fluctuations are inevitable, which means that sticking to a rigid percentage might not be the best idea.
We can help you to keep track of your retirement pot, ensuring that you don’t take more than you can afford, or more you than you need.
3. The effect of inflation
Withdrawing only what you need is a sensible way to manage your income.
If you have opted for drawdown, this approach leaves the maximum amount invested at all times. The invested fund will benefit from rises in the market and compound growth (although there is also the risk of the fund losing its value if the markets fall).
Taking only what you need has an additional benefit and one that might not be immediately obvious.
Withdrawing more than you need means you’ll have an excess that is likely to be held as cash. In the current climate of low savings rates and high inflation, this excess – rather than potentially growing as an investment – will be effectively losing value in real terms as it fails to keep up with the rising cost of living.
Each time you make a withdrawal, think about what you need the money for and plan to draw just the amount you need.
Get in touch
Using Pension Freedom options to access your pension gives you enormous flexibility but added responsibility too.
With life expectancies rising and stock market fluctuations inevitable, you’ll need to keep a close eye on your fund to ensure it doesn’t run out.
Balancing a comfortable lifestyle in the present with potential later-life costs and ensuring you can leave the inheritance you had hoped isn’t easy. Thankfully, we are here to help.
If you would like to discuss your retirement options, and how best to manage your flexible pension withdrawals, please contact us today.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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