Over half of drawdown pensioners risk running out of money

According to Royal London, 53% of income drawdown customers are making unsustainable withdrawals which could see them run out of money in retirement.

The worrying analysis, from the Drawdown Governance Service, reveals that only 47% of drawdown customers have a higher than 85% chance of their pension pot lasting a lifetime. This means that over half of savers are at real risk of running out of money in retirement if they continue to make withdrawals at the current rate.

Royal London did however recognise that there were some instances where clients had made a strategic decision to withdraw their pension promptly. For example, a 60 year old may choose to drawdown one pot to give them an income now before their other pots become available to them at age 65.

Understanding Income Sustainability

Income sustainability indicates the probability that you will be able to sustain your income for a specific period of time. If you’re a drawdown saver, one of the key conversations you’ll have with your Financial Adviser will be how sustainable your income is.

To determine sustainability, Royal London have provided the heat map below which indicates the sustainability of different withdrawal rates over different terms. For example, we can see that over a 25 year term a 4% income withdrawal is highly sustainable (colour code: dark purple). However, as the term increases to 35 years it becomes only moderately sustainable (colour code: orange).

Drawdown pension income sustainability. Source: Royal Londo

Royal London’s view is those who are found to have a ‘highly sustainable’ score of 85%+ have a very good chance of being able to maintain their income in retirement. Those with a score of 50% or less on the other hand have a very low chance of being able to maintain it.

The news about drawdown pensions also follows revelations from a poll conducted by Aegon in 2016 which suggested that only 8% of people were seeking financial advice. Aegon found that nearly a third of those going into drawdown did not see a Financial Adviser.

If you’re a drawdown saver and have a high capacity for loss, then income sustainability may not be so important to you. If you don’t, it’s essential that you understand the risk of running out of money in retirement especially if you’re making large withdrawals. Making the right decision on your retirement finances is hugely important and really should be done only with the help of a Financial Adviser.

To discuss the sustainability of your drawdown pension, call our team of experts on 01244 347 583 or email: info@innesreid.co.uk.

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The Financial Ombudsman Service (FOS) is an agency for arbitrating of unresolved complaints
between regulated firms and their clients. Further details of the FOS can be found on its website:
www.financial-ombudsman.org.uk