Drawdown disaster - pensioners run out of cash as they make ‘unsustainable’ withdrawals

Latest figures show that retirees are drawing down their pensions at an unsustainable rate. Many could end up running out of money altogether, forcing them to scrape by solely on the State Pension and benefits.

Since 2015’s pension freedom reforms, savers no longer have to lock their money away in an annuity at retirement, but are free to cash in their pension pots from age 55.

While most have been careful about making withdrawals, the numbers drawing down pension at an unsustainable rate climbed in the 2020/2021 tax year, according to new figures from the Financial Conduct Authority (FCA).

Many could run out of pension as a result and spend their final years in poverty.

Most retirees now leave their funds invested and take lump sums or regular income when they need it, a process known as drawdown.

A shrinking number buy annuities, which offer security because they pay a guaranteed income for life.

With drawdown, the income is not guaranteed. If you make too many withdrawals, your pension pot could run dry.

The pandemic has heightened the danger, by forcing many to raid their pensions or retire early, said Stephen Lowe, group communications director at retirement specialist Just Group.

As a rule of thumb, savers can withdraw four percent of their pension each year without depleting it. Worryingly, many are drawing double that amount.

“Drawdown rates continue to creep higher, with 43 per cent now withdrawing eight percent of their pension each year, up from 40 percent previously,” Lowe said.

Three-quarters of today’s retirees are now withdrawing more than the safe withdrawal rate of four percent, he added. “This raises concerns about the sustainability of their pension income.”

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Making regular withdrawals of eight per cent a year is dangerous, warned Helen Morrissey, senior pensions analyst at Hargreaves Lansdown.

“Pensions are a long-term game and with retirement lasting 20 years or more, taking large withdrawals early on means you may have to make tough choices about how much income you can take later.”

Morrissey added: “It may also mean you are less able to fund major expenses like social care if you need to, so monitor your withdrawals carefully.”

Making larger pension withdrawals is particularly risky when stock markets are volatile or falling, said Jon Greer, head of retirement policy at Quilter.

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“Markets can crash in an instant, and withdrawing at such a rate is risky as it can be hard to replenish your pot.”

Greer said pension freedoms have been a great success but people must tread carefully. “The State Pension is not enough to live off comfortably, so make sure your private savings can last.”

Managing pension withdrawals is likely to get harder as inflation increases, as this could force millions to withdraw more cash to cover everyday spending.

Another worry is that more than half of those accessing their pension pots for the first time last year did so without taking guidance or advice, rising to two third for those fully withdrawn.

Lowe urged people to seek advice or use the free Pension Wise service before making key pension decisions.