Pension mistake that could leave you ‘penniless in retirement’ – but there’s a way to avoid it

EXPERTS have warned savers over a pension mistake that could see them run out of funds in retirement.

Savers are being urged to ensure they have enough money to afford to retire before dipping into their pension pots or risk running out of cash by 82.

It comes the most recent Retirement Income Market data from the City watchdog, the Financial Conduct Authority (FCA), revealed well over 220,000 pension pots had a withdrawal rate of more than 8% in 2023/24.

That means people took around 8% of their entire pension as income during that year.

Pension withdrawals generally surged by 20% in the same period, with savers cashing out more than £52billion.

According to the FCA, pension drawdown continues to be the most popular option, with nearly 280,000 savers choosing it in the 2023/24 tax year – a 28% increase from the previous year. 

Drawdown is where you take your cash as income. This offers flexibility, allowing you to take money as needed while keeping the rest invested.

However, this method requires careful management to avoid depleting your funds too early.

The current minimum age at which you can access your pension is 55, rising to 57 in 2028. While it might be tempting to withdraw your entire pension in one go, it’s important to weigh up the risks. 

The first 25% you take out is tax-free, but the rest is added to your income. This means it’s subject to income tax and could potentially push you into a higher tax bracket. 

But the research shows many people are taking money out of their pension funds at a higher withdrawal rate, leaving them with less to get them through their golden years.

Experts from financial firm Hargreaves Lansdown crunched the numbers exclusively for The Sun and found that you could be left with no cash by 82 if you withdrew a typical pension at 8% each year.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Managing an income drawdown pot throughout retirement can be challenging.

“We don’t know how long we are going to live and with recent data showing there are over one million people over the age of 90 and almost 15,000 centenarians in England and Wales the reality is it’s likely to be a multi-decade endeavour.

“Understanding how much you can take to enjoy your retirement while making sure you don’t run out of money can be tricky with recent FCA Retirement Income Market data showing some unsettling trends.”

Of course, there will be times when you need to take more money from your pension – for instance, if you are planning a big overseas trip, Ms Morrissey explained.

She said: “However, if you are plundering your pot long-term then you face the very real threat of running out of money.”

What do the figures say?

Ms Morrissey has crunched the numbers to work out when exactly a pensioner would run out of money based on the rate they’re withdrawing.

These are all based on a £100,000 drawdown pot with investment growth of 5% before fees but as we know investment markets can be volatile, and you could see periods of time where your investments grow at a higher or lower rate.

She found that a 65-year-old withdrawing 1% a year – or £83.33 – from a £100,000 pension pot would still have £315,000 left at the age of 100.

If they increased this to a 2% withdrawal rate, the equivalent of £166.66 taken out a year, this would leave them with £240,000 at 100.

Pensioners withdrawing 3% – or £250 – would have £166,000 left by their 100th birthday.

At 4%, the equivalent of £333.33, they’d have £92,000 left in their pot.

A 5% withdrawal rate, which would mean £416.66 taken out every year, would leave the individual with just £18,000 at age 100.

When you get into the 6% rate the situation gets a bit more bleak.

A pensioner would have completely run out of cash by age 92 if they withdrew at 6% – which means around £500 withdrawn every year.

Those taking out £583.33 a year, or 7%, would be broke by the age of 86.

And finally, a withdrawal of 8% would mean you’d have completely run out of money by age 82.

With more than 1million people over the age of 90 and almost 15,000 centenarians in England and Wales, an 8% withdrawal rate would mean you could have to live a long time without any cash.

What are the alternatives?

Ms Morrissey said that in an ideal world, everyone would adopt a “natural yield approach”.

This is where you take income determined by how your investments have performed.

This means that you don’t eat into capital that could be needed later – for instance, if you need to go into care.

She said: “This will mean that the level of income you take will fluctuate so it can be a good idea to have a savings buffer to supplement your income during these times.

“We suggest having between one and three years of your essential expenses in an easy-access account.

“It’s also really important that you invest in line with your risk appetite.”

For example, Ms Morrissey explained, if you need income of 6% per year you need to be invested in assets that can deliver that kind of return.

Another option would be to adopt a mix-and-match approach to your retirement by using a mix of SIPP drawdown and annuities in your planning.

Annuities are retirement plans pensioners can buy to provide them with a fixed regular income for the rest of their life.

Rates are usually shown as how much money you will receive per year for every £100,000 you pay in.

For example, an annuity rate of 5% would mean you get £5,000 for every £100,000 you invest – so if you paid an annuity provider £50,000, you would get £2,500 a year.

You can annuitise in slices and make use of higher annuity rates as you age while keeping the rest of your pension invested where it has the potential to grow.

Recent data from HL’s annuity search engine shows a 65-year-old with a £100,000 pot can get up to £7,144 per year from a single life level annuity with a five-year guarantee.

A 70-year-old could get up to £7,885 while someone annuitising at 75 would get over £9,100 per year.

There’s also potential to boost your income further if you develop a health condition such as diabetes through an enhanced annuity, Helen said.

The Sun recently investigated what’s next for annuity rates as the Bank of England’s base rate drops.

“Securing levels of guaranteed income throughout retirement can give you peace of mind that you can meet your day-to-day expenses while leaving a portion of your pension to grow.”

How else can I get more money for retirement?

If your pension savings seem a bit short, it may be worth checking if you have any pots that you’ve forgotten about.

Millions of workers are estimated to have lost pension pots, with around one in 10 workers losing a pot worth £10,000, according to research by PensionBee.

We recently revealed how one saver found a whopping £100,000 from old factory job pensions he had forgotten about and now he’s planning to travel the world.

There are several other services available to help you track them down, including the government’s online Pension Tracing Service (or call 0800 731 0193).

Pension firm AJ Bell also has a service to locate old pension pots.

You can also try ringing your old employers’ HR department to ask for the details of your old pensions.

Provide information like the dates you were employed, as well as your National Insurance number.

If you have a spare room in your home or like selling goods, you could earn some extra tax-free cash.

Those who rent out a room in their home, such as through Airbnb, can earn up to £7,500 a year without paying tax.

There’s also a “trading allowance” of £1,000 for those who have a side hustle like selling goods on sites like Vinted or Depop.

The Government’s free Pension Wise service can help you if you’re not sure how to prepare for retirement.

Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.

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