Pension warning as Britons could ‘run out of money’ in later life

The start of the tax year usually brings about more flexible pension withdrawals, as Britons seek to take advantage of their new tax allowances. In addition, the rising cost of living could mean more people want liquid cash at their disposal.

But Britons are being warned to “stop and think” before accessing their cash, to avoid running out in later life.

The normal minimum pension age (NMPA) is currently 55, however, this is set to change.

The minimum access age is due to rise to 57 in 2028, which may help with cash longevity in retirement.

However, experts have warned Britons to think about the long-term when it comes to their savings, rather than just the here and now.

A failure to do so could mean older people are left in a challenging position later in their retirement

Tom Selby, head of retirement policy at AJ Bell, said: “Withdrawing too much, too soon from your fund means you’ll increase the risk of running out of money early – and potentially being left relying on the state pension.

“In 2023/24, the full flat-rate state pension benefits from a bumper 10.1 percent increase.

“This raises its value from £185.15 per week (£9,627.80 per year) to £203.85 per week (£10,600.20 per year). 

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“While this represents a valuable foundation income, it falls a long way below the spending needs of most people.”

The state pension is increasingly being viewed as a safety net for retirement income, with experts warning people to make their own savings.

In this sense, Mr Selby analysed some of the figures which may have to be managed, using a common example.

He continued: “Take a healthy 55-year-old with a £100,000 pension pot. If they withdraw £5,000 a year, increasing annually in line with inflation at two percent, and enjoy four percent annual investment growth after charges, their fund could run out by age 80.

“Average life expectancy for a healthy 55-year-old is in the mid-80s – with a decent chance of living well into your 90s.

“Such an approach would clearly create a serious risk of draining your pot early.”

Withdrawing too much money from a pension could create limited options for pensioners in terms of their income.

As it is likely to become more difficult to work as a person ages, there may not be another way to supplement one’s income years into retirement.

Mr Selby issued a stark warning about the possibilities for those who do not manage their money carefully.

He added: “If you raid your pension pot early, you’ll either need to keep your withdrawals very low, potentially harming your quality of life later in retirement; find other sources of income; or face up to the prospect of your pot running out sooner than planned and being left relying solely on the state pension.”

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Early access to one’s pension may also compound sustainability issues, given Britons are likely to miss out on investment growth.

Compound interest is viewed as one of the most favourable benefits of saving into a pension – other than tax relief.

Mr Selby concluded: “While savers have total freedom over how to invest their retirement fund, it usually makes sense to take a bit less risk when you start taking an income from your pot.

“At the very least you will need to sell some of your investments to make a withdrawal, meaning you might have somewhere between 12-24 months of income held in cash. This lower risk portfolio will inevitably have lower return expectations over the long-term.

 “What’s more, anyone taking money out of their pot early will have any investment growth applied to a smaller pot of money.

“For example, take someone with a £100,000 pension pot. If they withdraw £10,000 on their 55th birthday and enjoy four percent investment growth after charges, by age 65 their fund could be worth £133,000. If they didn’t take the £10,000 out and enjoyed the same level of investment growth, by age 65 their fund could be worth £148,000 – £15,000 more.”

With pension investments, people are urged to seek advice to make the best decisions for their retirement.

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