In the third quarter of 2017, 198,000 people made withdrawals from their pension funds under Pension Freedoms, 40,000 more than in the same period of 2016.
Why is the demand for Pension Freedoms so high?
Reasons for accessing pensions
According to research by AJ Bell, the reasons behind withdrawing money directly from a pension fund, rather than using it to purchase an Annuity include:
- Wanting control over their retirement savings 52%
- Perceiving annuities to have poor value 30%
For those citing the first reason, Pension Freedoms appears to be working, as 78% of people say they feel more in control of their retirement income due to accessing the fund early.
Is it wise to access pensions early?
Worryingly, the research indicates that many people who access their pensions fund through Pension Freedoms do not fully understand the key factors affecting them:
- Over half (53%) of those questioned don’t know how their pension fund is invested
- A quarter (26%) never review the amount they are withdrawing
This lack of fundamental understanding may be the reason why 46% of respondents admitted that they worry about running out of money.
So, how can you make sure that you know all the important information about your pension, and not have to worry about running out of money or starting to struggle financially part-way through your retirement?
Tips to avoid running out of money when you retire
- Know your finances; the income and capital you need to cover your essential (bills etc) and discretionary (holidays etc) spending
- Don’t forget to factor inflation in; you might be retired for 20, 30, or even 40 years. The cost of goods and services will rise, and eat into a fixed income
- Understand the State Pension; how much will it provide and what proportion of your expenditure requirements it will cover?
- Consider whether your savings, investments and pensions will sustainably cover the difference: If the amount you take each year is higher than the returns you are seeing, you will run out eventually
- Use conservative assumptions; overestimate inflation and underestimate the returns you will get on pensions, savings and investments
- Engage a financial planner, they will do all of this for you using sophisticated financial forecasting tools. They can help you make the right assumptions and give you the confidence that you are making the right decisions and that you will be financially secure and won’t run out of money
For more information and guidance regarding pensions, savings and retirements, get in touch.
Please note:
The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
