Retirement Freedoms – Pensioners Risk Running Out of Money

Sand timer and coins showing pension freedoms can mean running out of money


MoneyPlus Features Team

20th November 2015 at 7:00am

With new pension freedoms giving retirees the opportunity to steer away from annuities, pensioners risk running out of money early on in their retirement with even modest withdrawals from their savings pots, warn AGE UK.

They’ve estimated if someone withdrew £3,000 annually from a £29,000 pot from the age of 65 – with returns running at 3% a year – their savings would run out by the time they were aged 75. And with life expectancy for today’s 65-year-olds currently at around 83 years for men and 86 for women, that is a major concern.

To back these figures up they also added that in 2013, the median average annuity bought with a pension fund was only £20,000.

Startling comparisons   

This forecast was further endorsed by a report from the Social Market Foundation (SMF), ‘Golden Years? What Freedom and Choice Will Mean for UK Pensioners’.

By studying countries where similar retirement freedoms are more established – mainly the US and Australia, their analysis has estimated four in ten retiring at 65 would have run out of cash by the age of 75 if they spend at the same rate as Australians have, or if they followed US habits cash would last until they are 82.

And even if many retirees manage to make cash last for the rest of their life, the Government would still face huge bills for those who fall short, the SMF warned.

It makes for alarming reading given more than 200,000 people in the UK have emptied their pension pot or withdrawn cash from it after the relaxation of rules on accessing retirement savings this year.

So is there a solution?

Age UK has called for more safeguards to be put in place to help people control their spending. In a report, entitled ‘Dashboards and Jam Jars’, they urged pension providers to develop new ‘pension jam jar’ tools to help people to budget, control their money and reach goals for their cash.

A jam jar approach

On the subject of jam jars, one possible industry approach is designed to balance your short term need for income with a longer term need for money to grow. So your money is invested in lower risk investments for spending today and growth investments for tomorrow.

Your money would be split between up to three pots (or jam jars) to give a mix of lower risk and growth investments.

The aim is for you to spend the money in Pot 1 over the first few years of your retirement. Then you start spending the money in Pot 2 then finally Pot 3. This means Pot 3 has a better chance to grow before you start to spend it.

After you’ve spent the money in Pots 1 and 2, your remaining money is all invested in Pot 3.

Industry innovation

Whilst freedoms and flexibility can be a great thing, it is vital people are educated on the need to budget accordingly and avoid the danger of running out of money too early in retirement.

Age UK makes a strong point that the providers can play a crucial role in equipping the public with the tools to make wise decisions about their retirement income.


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