The number of people using Pension Freedoms to make withdrawals from their pensions reached an all-time high in the first quarter of 2018, with 222,000 taking an impressive total of £1.7 billion.

Current trends

Of the pensions accessed under Pension Freedoms, research by AJ Bell found that 53% have been fully withdrawn. In isolation, this figure is concerning for the longevity of the individuals’ retirement, but it’s likely people have more than one pension, and expected they would withdraw the smallest first.

In fact, 90% of fully withdrawn pensions were worth less than £30,000; not insignificant, but hardly blowing it on ‘a Lamborghini’ territory, as Steve Web, former Pensions Minister suggested you could do!

The research also found that average annual withdrawals were £6,612 from an average pension fund of £104,000. Whilst taking 6.4% of the value a year doesn’t sound too detrimental, without considering investment returns, this modest annual income would exhaust the fund in less than 16 years.

Most concerning is the revelation that 41% of retirees are making withdrawals of over 10% a year. Their pensions are likely to be depleted in under eight years, leaving a serious shortfall, potentially meaning they have to return to work or downsize property.

What level of income is affordable?

To determine your realistic retirement income, the first consideration will always be the value of your pension accumulated. However, there are other influences. Individual circumstances do vary, but here are four, often overlooked, points;

1. Lifespan

Recent research from Retirement Advantage has found that almost 80% of people over 50 significantly underestimate their lifespan. On average, men and women aged between 50 and 64 expected to live to 82 years old. Statistics suggest their actual expectancy to be 88 and 90 years old respectively.

2. Lifestyle

You’ll want to enjoy your extended time away from the workplace to the utmost. Consumer group Which? propose that retired couples wanting to enjoy holidays and purchase a new car every five years (as well as the daily essentials), will need around £39,000 a year. Your State Pension will make up some of this figure, but can your personal pensions cover the rest?

Reflect on your lifestyle and regular commitments now, you ideally won’t have any mortgage liability to take in to retirement, but what monthly commitments are likely to continue? How do you intend to spend your new-found time? Golf clubs can be expensive!

3. Hidden costs

Nobody likes an unexpected bill through the letterbox, but there are potential costs in later life you may not have considered.

The likelihood of needing long-term care is increasing with life expectancy, and the average nursing home costs around £40,000 a year according to the Money Advice Service. Care costs can be difficult to predict, but understanding best and worst case scenarios helps you plan for either.

In contrast, if you are fortunate enough to be in great health, you are more likely to be travelling, enjoying new hobbies and spending. You may spend as much, if not more, than the cost of care.

Inflation is also very important; holding only cash deposits rather than an invested pension fund (as the FCA report 33% of non-advised retirees are doing), means that in real terms your pension will lose purchasing power.

4. Market conditions

We have experienced a nine-year bull run and markets are near an all-time high; complacency towards market fluctuations may have set in. According to the research, those approaching or already in retirement expect a gross annual investment returns of almost 6%. If markets were to take a down turn, the levels of withdrawals currently taken would quickly become unsustainable.

Why financial planning matters

Retirement planning is much more complex since Pension Freedoms, thanks to significantly more options now available to you. Couple this with comprehending your own longevity, realistic spending and understanding how market fluctuations could impact you, it’s clear that professional financial planning is more relevant and valuable than ever.

This is where we come in; at Beaufort Financial, our service combines the ‘art’ of knowing and understanding your life goals, with the ‘science’ of identifying the best financial solutions to help you to achieve them.

If you would like to discuss your retirement options, please get in touch.