Thousands of retirees who have moved their pensions into drawdown are not taking basic steps to work out how much they can afford to take from their pot now to ensure it can support them for the rest of their life. This is putting them at risk of draining their savings too soon, according to new research1.
Four years on from the introduction of Pension Freedoms, over 435,0002 people have shifted their pensions into drawdown. However, just a third (34%) of retirees in drawdown calculated how much sustainable income they would be able to generate from their pot before retiring.
A third (34%) calculated how much money they would need to cover day-to-day living expenses and, again, just a third (34%) considered how long their money would need to last, be it 20, 30 or 40 years. Even fewer (22%) calculated how much money they would need to fund leisure activities, such as going out for dinner and going on holiday.
Worryingly, this lack of planning also encompasses retirees’ investment strategy. Only 16% decided where they would invest their drawdown funds to achieve the desired income. As few as 17% decided which strategy they would use to withdraw income, be that selling units of investment funds or shares, or living off the dividends and interest the funds or shares produce and leaving the underlying investments untouched.
Many retirees in drawdown are relying on blind luck to make their savings last throughout retirement. But by taking simple steps and obtaining professional financial advice, you can work out how much is affordable to take from your pot to ensure you do not withdraw too much, too soon.
It’s not just retirees themselves that this lack of planning will impact; it also has consequences for people who are set to inherit this wealth. Just one in five (19%) retirees in drawdown have ensured that their partner has the financial knowledge and understanding to continue managing their investments.
Only 15% of retirees have put a financial plan into place for when they or their partner pass away. Many people don’t like talking or even thinking, about themselves or a loved one passing away.
However, to ensure wealth is passed on efficiently and not leaving loved ones swamped by complex financial decisions, it’s important that those set to receive an inheritance are engaged with financial conversations from the outset.
1 Retirement Income Market Data Bulletin – https://www.fca.org.uk/publication/data/databulletin-issue-14.pdf
2 Research undertaken by YouGov on behalf of Zurich. The online questionnaire was completed by 660 retirees who have entered drawdown and was undertaken between 3-15 October 2018.