The figures show that pension pots could last anything from a lifetime to just 13 years, depending on the withdrawal and investment returns.
Standard Life has been crunching the numbers to help savers see what will happen to their finances in retirement, based on different withdrawal and investment scenarios.
The new analysis highlights the challenges of navigating retirement – given the uncertainty people face when planning for a combination of living costs, investment returns and longevity. And it comes as new FCA retirement income data reveals that in 2023/24 over 225,000 individuals made annual pension withdrawals of 8% or more.
Their analysis examined two withdrawal scenarios based on a pension pot of £100,000 and applied a fixed withdrawal of £4,000 and a higher one at £8,000 per year. These are equivalent to 4% and 8% of the initial pot respectively and are commonly used according to the FCA retirement income data for 2023-2024.
The analysis then assessed the impact of different investment returns on the pension pot after ten years, ranging from a return of 8%, 5% and 2%.
While these figures are illustrative, the FCA’s retirement income data shows that over 225,000 individuals actually made withdrawals at 8% or above. The figures also show that more than 50,000 individuals with pension pots between £50,000 and £99,000 made regular withdrawals of 8% or more in 2023 / 2024.
A further 40,000 individuals with pots between £100,000 and £249,000 were also drawing down at this level, highlighting the potential risk of outliving their savings.
Flexibility vs risk
Pete Cowell, Head of Annuities at Standard Life said: “Pension freedoms gave retirees greater choice and flexibility, but with that freedom came responsibility and considerable financial planning challenges to weigh up. While those who accessed their pots for the first time in 2015 may now be taking stock of what remains, many current retirees are also likely to have the safety net of a DB pension to fall back on.
“However, with DB pensions in decline, and more people approaching retirement with larger, defined contribution pensions, monitoring the balance between withdrawals and investment returns has never been more critical to avoid outliving a pension.
“Through these illustrative scenarios, the investment returns are predictable each year, but the reality is that people will experience investment ups and downs while in drawdown –which makes predicting how much your pot will be worth all the more difficult.
“Inflation will also be a key consideration, as people will need to manage this risk over the long-term to ensure their purchasing power isn’t eroded.
“There are options for those who want to mitigate investment and longevity risk. Many people are opting to cover their essential living costs with a guaranteed income through a combination of the state pension and an annuity. This approach removes many of the unknowns as you know your core living costs will be met while also providing the potential for investment growth on any pension placed in drawdown.”
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