Figures from the Association of British Insurers (ABI) show that in the first full year since the pension freedoms began, the majority of retirees are being sensible.
Retirees taking advantage of the pension freedoms introduced last year are being sensible rather than reckless, according to figures released by the Association of British Insurers (ABI).
The ABI published data for the first full year since the pension freedoms began, from April 2015 to April 2016.
One of the key findings was that the majority of retires – six in ten – are withdrawing money from their pension pots at a rate of around 4% a year. Only the minority, around 5%, have opted to take big withdrawals, equal or greater than 40% of their pots.
According to the ABI, "the majority of savers are taking a sensible approach". The trade body, however, cautioned that "there are signs a minority may be withdrawing too much too soon and at rates that would see their money run out in a decade or less".
One of the biggest dilemmas for retirees who decide against buying an annuity have is establishing how much income to withdraw each year in order to avoid the nightmare scenario of leaving the retirement cupboard bare.
Most financial advisers stress that a maximum withdrawal rate of 4% is sensible, and that it’s preferable for retirees to draw only the income produced by the pension investments (the natural yield), rather than stripping away capital.
But recent research by Morningstar concluded the 'safe withdrawal rate' for UK pension savers is 2.5%.
Morningstar’s premise is that over any 30-year period the income payments will always be met, increasing in line with inflation. The overall capital may fall or remain intact, depending on market conditions. But the capital value will last those 30 years.
This story was originally written for our sister publication, Money Observer.