Pension income along with state pension payments are crucial in retirement, especially for individuals with limited financial resources. Retirement assets could be put under pressure however as unforeseen issues such as coronavirus force people to dip into their pots.
“As such, some people in their late fifties, who are not yet retired but may have been furloughed or otherwise had their income cut by COVID, are looking to their pension pots as the solution.
“This is an incredibly dangerous game to play.”
Jonathan went on to illustrate how withdrawals could affect a person’s retirement options, showing worrying concerns for longevity: “For illustrative purposes, let’s take an average UK pension pot of £250,000. For those aged 55 now, average life expectancy is between 84 and 87, whilst state retirement age is 67, meaning that pension pot needs to last 20 years.
“With that in mind, people have approximately five percent of their pot, or £12,500 to cover each year’s living costs.
“By taking 25 percent out at age 55, even if they spend at the above steady rate, that only gives them five years of living expenses, or up until age 60.
This is seven years shy of the state retirement age and seven years short of when they were planning to retire.
“What’s more, when they draw down this money and place it in a bank account, it will earn just 0.1 percent interest, which versus current inflation (1.94 percent) means it is losing value in real terms.
“This seven-year shortfall is further compounded by the fact their invested pension savings are only 75 percent of what they were pre-draw down, meaning their expected annual income from the pot drops from £12,500, to £9,300.”
Many people will likely underestimate how long their retirement will last.
They may also overestimate how far their pension pots will stretch in later years.
The FCA released data towards the end of 2019 which revealed worryingly low levels of pension funding.
The “Retirement income market data 2018/19” showed that four out of ten pension pots accessed in the period had a value of less than £10,000.
On top of this, over 350,000 pension pots were fully withdrawn at the time of access, with 90 percent of them being less than £30,000 in value.
To illustrate how impactful this is; £30,000 is around the average salary level for the UK, a figure that is meant to support people for a year or so and not a full on retirement.
Jonathan concluded by reiterating the importance of seeking advice in light of these findings: “It is important people fully understand the long-term implications before making financial decisions, especially when it involves their pensions.
“Whilst COVID-19 is placing a tremendous strain on many people’s finances, it is important people speak to a professional adviser before making potentially life altering financial changes.”
Published at Sat, 16 May 2020 03:00:00 +0000