Many retirees deplete their retirement savings a full decade before they die, after treating them more like a financial windfall than a source of steady income for life.
Insurer Legal & General has labelled this the “Lottery Effect”, where overnight access to large sums can trigger impulsive or unsustainable spending.
Since 2015’s pension freedom reforms, savers are free to access their entire pension pots at age 55, to spend as they wish.
Making the money last for life requires discipline but new L&G research shows that retirees risk emptying their pension pots a decade too soon as they take large cash lump sums and withdraw too much monthly income.
People begin accessing their pension funds at age 60 on average, with a typical pot size of around £87,500.
Many choose to take their 25% tax-free lump sum at that point, then draw an average income of £875 per month upon reaching state pension age.
Most expect their pension pots to last for 22 years, but making their cash stretch isn’t easy. Especially for those without additional income sources, such as a rental property or defined benefit “final salary” pension.
Too many see their savings run dry by age 77.
Yet at age 60, average life expectancy is actually 86. This means many are on course to run out of cash with nine years of retirement still to go, leaving them reliant on the state.
One in seven admit they treated their tax-free 25% pension lump sum as an unexpected financial bonus, rather than part of their long-term savings plan.
A further one in 10 said it felt like payday, and they wanted to spend.
Almost a quarter said they took out a cash lump sum or would consider doing so because they wanted to put it into a current account or cash ISA.
Yet the interest from a standard non-ISA savings account may be taxable, whereas money rolls up tax-free in a pension. Cash may also generate a lower return than pension funds.
By taking large sums pensions savers also risk losing entitlement to means-tested benefits, such as Universal Credit or Pension Credit.
Katharine Photiou, managing director of workplace savings at L&G, said for most of us our pension is the largest sum of money we’ll have access to. “After decades of hard work and saving, it’s natural to view it as a well-deserved reward. But what seems like financial freedom today might turn into uncertainty later.”
Managing your money to make it last throughout retirement isn’t easy.
The decision to draw pension has been further complicated by the Budget, with Chancellor Rachel Reeves planning to slap inheritance tax on unspent pension savings from March 2027. “This could lead to more people withdrawing from their pots in an unsustainable way,” Photiou said.
Almost six in 10 savers who accessed their pension did so without seeking any formal advice or guidance from their pension provider
Legal & General has launched a Guided Retirement Planner to help the 5.5 million members of its direct contribution workplace pension schemes.
Others should see what their employer offers, while the over-50s can get a free, independent consultation with the government-funded Pension Wise service, available through MoneyHelper.org.uk. Or consider independent financial advice.
