A think tank is warning that retirement savers in other countries with flexible pension freedoms like the UK often run out of money by the age of 75 years old.
The study looks at what might happen if UK retirement savers cash in their pensions in the same way as those in the US and Australia.
The Social Market Foundation research found retirement savers tended to access their pensions in three ways:
- Cautious Australians who underspend because they do not want to run out of cash during retirement. Typically they access 1% of their savings each year.
- Quick-Spending Australians who make up four out of 10 retirees who spend too much too soon and run out of savings by the time they reach 75 years old
- Typical Americans who also spend quickly by taking 8% of their savings each year
Generally, financial advisers suggest drawing down 3% to 4% of savings a year as this amount should be replaced from investment performance.
Pension saving burn out
According to pension modelling carried out for the report, if British retirees were to follow the examples set by Quick-Spending Australians; their pensions would burn out in 10 years after giving up work.
If they acted like Typical Americans, their pensions would be exhausted 17 years after retirement.
In each case, this is several years less than official figures in the UK predict as how long people live in retirement
The foundation warns that if savers withdraw pension cash too early in retirement that they will maintain the lifestyle they had while working for a while, but risk running short of money in their later years.
Risk of relying on investments
“Income drawdown also presents a problem because the option is investment based,” said a spokesman for the foundation. “Investments can have variable returns and it is difficult to predict how long they might last.
“The State Pension may keep people above the poverty line, but if they run out of savings their standard of living will lower considerably.”
The report also warns that the hidden implication of retirees running out of cash too soon means the government may have to pay out more in benefits to subsidise pensioners who went on spending sprees rather than prudently planning their expenditure.
About John Cassidy
