‘Spend it all and let the last cheque bounce’ - it’s not a bad way to look at your retirement fund, notwithstanding the fact that we’d never endorse writing cheques you’re not good for.
To put it another way: plan your retirement spending to give the maximum income possible while making your money last until you die.
But it’s easier said than done. None of us really know how long we’ll live or what spending demands will be placed upon us during a retirement which could last many decades. That makes spreading your pension across your retirement, but not so thinly that you leave money behind unnecessarily, a difficult task.
For those using Defined Contribution pension savings to live from in retirement, the challenge is made harder because our pension pot will also rise and fall in unforeseen ways thanks to investment returns.
When new pension rules were introduced in 2015, a widespread fear was that retirees would spend their money too quickly, blowing it all on the proverbial Lamborghini. The jury is still out on whether that’s happening because even official data on withdrawal levels cannot tell us if these withdrawals were appropriate or not - if a person had ample income and wealth elsewhere, it may have made perfect sense to then to then withdraw all their pension money in one go.
There is evidence, however, to suggest that rather than being too reckless, retirees are being excessively cautious. A report out this week from the Institute for Fiscal Studies looked at the use of wealth in retirement, including how quickly retirees spend their money.
The report measured how quickly overall wealth was expended - it did not track pension withdrawals in isolation - but it reveals plenty about our attitudes to saving and spending in retirement, nonetheless.
It showed that people aged 69 to 81 burned through an average 14% of their wealth in the 12 years that IFS was tracking their finances - a little more than 1% per year. This slow rate of spending suggests, the IFS said, that most retirement wealth will not be spent, but passed on after death.
In its words: “The fact that financial wealth is held on to in the way we have shown is likely to provide more reassurance to those concerned that retirees will spend their DC funds inappropriately quickly, than to those concerned that retirees will hold on to their funds too long and deny themselves higher living standards that could be afforded.”
Setting pension withdrawals at the right level is likely to take vigilance and regular monitoring to ensure that the sums being taken are sustainable. We’ve covered before the danger of posed ‘pound cost ravaging’ - where withdrawals are made when asset values are depressed, meaning paper losses are crystallised and lasting damage is done to retirement funds. There is always risk when savings are invested, but there are actions you can take to reduce them.
Those confident taking their own investing and financial planning decisions can still access free guidance on how best to make their pension money last. Others will benefit from paid-for independent financial advice.
The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944.
Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
Combining your pensions into a SIPP can make it easier to manage your savings - and it could be cheaper, with lower service fees than you’re currently paying.