Warning to retirees of draining pension in ‘lottery effect’
Research carried out by financial services and asset management company Legal & General (L&G) has found that those reaching retirement could be jeopardising their future by spending too much of their pension early on.
Individuals currently receive access to large sums of money overnight, leading to what has been called the ‘lottery effect’, and resulting in impulsive or unsustainable spending. Where consideration is not given to the length of time the pension needs to last, L&G warns that retirees could run out of money.
Currently, a 60-year-old has an average life expectancy of 86 years. L&G suggest that they could be facing a nine-year deficit, with funds running out during their lifetime.
Access to a lump sum from pensions
When given a pension lump sum, 15% said that they regarded it as an unexpected financial bonus and not part of a long-term savings plan. For 10% of respondents, access to the money felt like a payday, and they wanted to spend it.
Around 22% said that they would put the money into a current account or cash ISA for a rainy day. Some 46% said they accessed it just because they could and so that they had it to hand. L&G warn that this risks individuals facing tax bills or losing means-tested benefits such as universal or pension credits.
It is also important to bear in mind that once the lump sum has been taken out of the pension pot, the potential benefits of pension investment will be lost.
The risks of removing too much from a pension
L&G say that on average, individuals hold £87,500 in their pension pot to start with, and 32% will take a cash lump sum when they become eligible for this, on average at the age of 60. Of those who make a withdrawal, the average removed is 25% of the sum held, which is the maximum that can be taken tax-free. They have an average income of £875 per month once they reach state retirement age.
Regrets on taking cash from pension
Out of those who had taken a lump sum from their pension, L&G found that 14% either had regrets or had spent more than they intended to. A total of 29% had had unexpected expenses to meet, while 26% had thought at the time that they could afford to take out the money.
For 15%, there were now concerns about outliving their pension savings.
Some 58% of respondents who had accessed their pension had done so without taking formal advice or seeking guidance from their pension provider or other support service. Looking at those who regretted their withdrawal and spending, 11% said that they had not fully understood the impact of their decision.
Retirement planning
Katharine Photiou, Managing Director Workplace Savings at L&G said:
“For most people, their pension pot is the largest sum of money they’ll have access to, and after decades of hard work and saving, it’s natural to view it as a well-deserved reward. As we know, many people do sit on their savings and will have enough to last through the years they are retired. However, our research shows the sudden financial freedom can trigger ‘The Lottery Effect’ for some savers, which can lead to unsustainable spending. On top of this, with unused pension savings also subject to IHT from 2027, it could add to people withdrawing from their pots in an unsustainable way.
But what seems like financial freedom now might turn into uncertainty later. Everyone’s situation is different, and some people may turn to other potential sources of income, such as their property, to make up the shortfall. Regardless of how you’re thinking about funding your retirement, seeking guidance can ensure you fully understand your options, helping you to make the best choice for you.
There is free support and guidance available for everyone wanting to make more informed decisions, and it is worth speaking to your provider to understand what is on offer. For example, L&G has launched a Guided Retirement Planner for all our workplace members to help ensure that more people can afford the retirement they would like to have.”
When considering future planning, it is also important to ensure a valid Will is in place, providing for loved ones in the most tax-efficient way possible.
Contact Us:
If you would like to speak to one of our expert estate planners, ring us on 01634 353 658 or email us at rob@pembrokewillwriters.com