Retirees withdrawing too much from their pensions, HMRC figures show

14 May 2019
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Britain’s retirees are withdrawing above the suggested 4% annual withdrawal rate from their pensions, according to figures released by HMRC.

The latest figures show that the average pension withdrawal in the UK is £7,254. With the average pension pot of those entering drawdown being between £80,000 and £123,00, that puts the average withdrawal rate at between 6% and 9% per year.

This figure is way above the recommended 4% figure deemed sustainable over the long term. Even then, according to research from Addidi Wealth Management based on data going back to 1900, there is a 25% likelihood that a withdrawal rate of 4% will completely deplete a pot in 30 years.

So with the average pension withdrawal well above the 4% figure, are Britain’s retirees at risk of running out of money?

Not necessarily, according to Michael Martin, private client manager at 7IM. He believes that retirees should take a more flexible approach to the 4% withdrawal rule.

Mr Martin argues: “It’s often suggested that withdrawing approximately 4% of your pension should help ensure that your pension pot lasts you through retirement.

“However, while this may be a useful rule of thumb, retirement planning is rarely that straightforward and the reality is that your income needs at retirement are not linear and will change continuously, making it rather pointless to stick rigidly to an arbitrary withdrawal rate.

“You’ll need to plan for these evolving phases, along with fluctuations in your income and spending. For many, this means a higher income initially, which tapers away over time.”

At the same time, many pensioners in the UK have multiple pensions and other sources of wealth and income. Many will also have a final salary pensions, as well as equity in their home.

As Will Hale from Key notes: “Property is increasingly a major part of retirement planning, with retired households literally sitting on more than £1 trillion of wealth.”

Data from Key shows that retired homeowners using equity release plans take an average £76,500 in property wealth from their homes, enough to fund six-and-a-half years of basic expenditure.

How retirees can manage pension cash flow better

According to 7IM, there are four strategies that retirees can use to better manage their cash flow:

  1. Consider whether you need to withdraw anything at all from your pension pot. Just because it becomes available, it should not necessarily be used. Pensions are a tax-efficient way to pass assets on to the next generation, so consider other forms of savings or income first.
  2. Don’t overlook annuities, largely forgotten about since pension freedoms was introduced. According to 7IM: “Annuities can still play a crucial part in managing your retirement income, as they promise a regular income for the rest of your life.” You may want to consider allocating just a section of their pension to an annuity, to cover ‘essential’ expenditure.
  3. Stay invested. A common mistake is to go into cash too quickly in order to reduce market risk. That, however, introduces a new risk: inflation. Interest rates are not expected to rise above inflation anytime soon, meaning that withdrawing your pension and placing it in a savings account means that it will be eroded in real terms over time.
  4. 7IM recommends keeping an eye on your portfolio performance and adjusting your withdrawals accordingly. “If in the first year the value of your portfolio goes up 7%, then it might be sensible to withdraw only 4%. If in the second year, you return 8%, then you might want to withdraw 5% or even stick with just withdrawing just 4%.” The point is to remain flexible and try to keep withdrawals below annual returns.

This article first appeared on our sister website Money Observer

Comments

In reply to by anonymous_stub (not verified)

Financially Independent Retired Early.Making use of the ability to withdraw in excess of the 4% whilst staying under the higher rate tax band whilst I can, before the state pension pushes me closer to 40% tax, limiting scope for 20%tax withdrawals. However, the money isn't spent, it's reinvested in ISA's.

In reply to by Xrat (not verified)

@financially Independent. Your comment contains more practical advice in one paragraph than the rambling article.For pension contributions made whilst a 40% taxpayer, then withdrawing your pension up to the current £50k tax limit paying only the basic 20% rate minimises your tax bill.Using the surplus pension amounts withdrawn and investing it into Stocks & Shares ISA means the future income is tax free.

In reply to by Xrat (not verified)

@financially Independent. Your comment contains more practical advice in one paragraph than the rambling article.For pension contributions made whilst a 40% taxpayer, then upon retiring withdrawing your pension up to the current £50k tax limit paying only the basic 20% rate minimises your tax bill.Using the surplus pension amounts withdrawn and investing it into Stocks & Shares ISA means the future income is now tax free.

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