Retirees could outlive their pension pots, PPI warns

More than one in four retirees could outlive their pension pot, worrying new research from the Pension Policy Institute reveals.

More than one in four retirees could outlive their pension pot, worrying new research from the Pension Policy Institute reveals.

The independent research organisation says those approaching retirement with high levels of defined contribution (investment-based) savings but little or no defined benefit (salary-based) pension will face tough choices.

Depending on the products and investments they choose, these savers could see their retirement income vary by up to 70 per cent, the PPI warns. It says those who withdraw up to 10 per cent of their pension pot each year could find their money runs out some 15 years before they die.

A key challenge facing retirees is to assess how long they will live and how best to manage their money accordingly. Recent research from the Institute of Fiscal Studies found people routinely underestimate how long they will live, and how long their savings will have to last.

-Underestimating life expectancy is costing retirees

Thus people born in the 1940s, asked at age 65, estimated only a 65 per cent chance of making it to age 75 – far below the official estimate of 83 per cent for men and 89 per cent for women.

Emma Byron, managing director for individual annuities at Legal & General, which sponsored the research, says: ‘Pension reforms have given many of us the flexibility we want for retirement, but they also mean that we have to make our own decisions about how we access our pension pots.’

Equally important is active engagement with your pension fund while it builds up. Research by investment firm Hargreaves Lansdown shows more than one in five people actively choose their own pension investments rather than sticking with the default options, and almost half of those with more than £25,000 saved.

This can lead to better outcomes than staying in default pension funds, which are often conservatively managed. Indeed, choosing the right funds can significantly enhance your savings over the very long term – the Hargreaves research shows that boosting your returns by just 1 per cent a year throughout your career could get you an extra £60,000 in your pension pot by the time you retire.

Hargreaves gives the example of someone earning £28,000 who starts saving 8 per cent of their pay (including tax relief and employer contributions) into a pension at age 22 and retires at 68. They could expect a pension of £190,961 if their investments grow at 5 per cent a year. But if their investments grow at 6 per cent, their pension pot could reach £250,036.

Byron adds: ‘The fact that many of us could potentially outlive the money we’ve saved for later life shows the importance of taking advice when it comes to planning retirement, whether it’s to understand the various options such as annuities and drawdown or to get a better understanding of how the choices we make might affect our experience of later life.’

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