Thanks to pensions freedoms, from the age of 55, you can take as much out of your private pension as you like. At that age you have the freedom to buy an annuity, elect to use a drawdown scheme or deplete the money in your pension as you wish. An annuity, in its simplest plain vanilla form, pays you a fixed amount until you die. Since the new pension freedoms were introduced people electing to use a drawdown scheme have outnumbered those choosing to buy an annuity by 2 to 1. This is hardly surprising because annuity rates are unattractive right now. The purchase of a simple £100,000 annuity with no additional benefits will generate a fixed annual income from 60 of around £4,600.
But not all those opting to use the drawdown option are managing their money carefully. Broker AJ Bell cites a ComRes survey of 250 people who have gone for the income drawdown option since 2015. Nine retirees in twenty were taking out annual withdrawals of 10 per cent or more. And the figure is nearly six out of ten for people in the 55-59 age bracket.
Now what’s likely to happen? Let’s assume that the pension before withdrawals grows by 4 per cent a year after costs, which seems reasonable. Now on average these respondents started with a £118,000 pension pot. Those who elected to withdraw £11,800 a year (10%) ran out of money after 12 years. That means no income from your private pension by the time you enter your seventies yet the average life expectancy of someone reaching the age of 60 in the UK is 84 years. It seems clear that many people have entered drawdown plans without taking expert financial advice.
After seeking advice, a smarter solution would have been to take out £7,000 a year (6% of the initial £118,000 pension) when under the same assumptions the money would run out in 26 years. And by taking out a smaller amount, you benefit more from the compounding of the investment pot, so you end up taking out £184,000 from the scheme rather than £142,000. Financial advice will cost you a small fraction of that difference.