Since the introduction of Pension Freedoms in 2015, using Flexi-Access Drawdown has become an increasingly popular way to access retirement savings. But research suggests that some could be withdrawing too much, putting them at risk of running out of money.

Flexi-Access Drawdown allows you to leave your pension invested and adapt how much income you take from it over time. For pensioners that want flexibility and greater control over their retirement finances, it’s proved a popular option. However, it does come with the responsibility to ensure that a sustainable level of income is withdrawn. Taking too much, too soon, could lead to financial hardship in later years.

According to Royal London’s Drawdown Governance Service:

  • Just 47% of customers have more than an 85% chance of their income lasting them for life
  • 53% have a higher risk of running out of income during retirement

The figures show that over just a 15-year retirement, a 6% withdrawal rate is sustainable. However, as the length of retirement increases, the sustainable withdrawal level quickly decreases. As life expectancy also increases, more retirees are going to be drawing down on their pension for longer. It’s not uncommon for retirement to last 30 or even 40 years. As a result, a 6% withdrawal rate is unlikely to be sustainable for many.

It’s important to note that while Royal London’s figures suggest that more than half are taking a level of income that’s unsustainable, this may not be the case. Some may be aggressively running down some of their pensions with the intention of doing so and in the context of wider financial plans. A retiree with several pensions, for example, may choose to access them in turn rather than simultaneously.

What a sustainable level of income looks like will depend entirely on your assets and goals.

Lorna Blythe, Head of Investment Solutions at Royal London Intermediary Pensions, said: “For some income drawdown customers income sustainability is not so important, as they have a high capacity for loss. For others, it’s extremely important that they understand the risk around potentially running out of money.”

What can you do to improve sustainability?

We’ve already mentioned that there’s no firm rule on what a sustainable level of income is. However, there are steps everyone should take to improve the chances of their retirement funds lasting through retirement.

  • Factor in life expectancy and health: It’s impossible to begin working out a sustainable level of income without considering your life expectancy. It plays a fundamental role in how much you can afford to withdraw each year. It’s common for people to underestimate how long they will live for, potentially leading to higher than sustainable withdrawals.

You should also consider your overall health. The number of people reliant on some form of care is rising as more people live into their 80s and 90s. Many retirees are responsible for paying their own care costs, either partly or wholly. As a result, factoring care costs into later life income needs may be necessary.

  • Review your other assets: Aside from your pension do you have other assets that you’ll use to fund retirement? If your assets include other savings or investments, for example, you’re in a better position to withdraw more annually. As a result, these assets should be considered when assessing your pension, rather than being viewed separately.
  • Project investment returns: There’s no way to guarantee how your investments will perform. Despite this, projecting how your pension is likely to change over the years, including potential returns, is important. The higher the investment returns, the more income you’ll be able to withdraw sustainably. That being said, projecting returns is only part of the task. You’ll need to regularly review how your investments are performing to stay on track.
  • Assess the risk you pension is exposed to: Traditionally, workers nearing retirement would decrease the amount of risk their investments were exposed to. However, as retirements have gotten longer thanks to rising life expectancy, more retirees are choosing to remain invested with a certain level of risk, in a bid to make their money go further.

On the one hand, this gives you an opportunity to benefit from investment returns. But, on the other, you may need to lower the income you take if investments perform badly over a period. If your money is still invested, it means taking a more active role in the management of your pension is wise.

  • Keep some assets in reserve: Even the best-laid plans can go amiss. For this reason, it’s a good idea to keep some of your assets in reserve. This way, should you run out in your later years or the value of your pension decrease, you have other capital you can fall back on.

If you’re using Flexi-Access Drawdown or plan to in the future, please contact us. We can help you understand how much you can sustainably withdraw annually from your pension and whether it’s the right option for you.

Please note: Pensions are not normally accessible until age 55. Using Flexi Access drawdown can leave your funds invested and the value of your investments (and any income from them) can go down, which would have an impact on the level of pension benefits available. Your capital is at risk. leaves your funds in Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.