Ensuring you have enough for a comfortable retirement isn't just about building up your savings and investments: it's also important that any withdrawals from your pension pot are made at a sustainable rate.
Five years on from the launch of the pension freedoms, new research suggests that some people are at risk of running out of money in retirement because they are taking too much cash from their pension savings.
The pension freedoms have given savers greater flexibility with their pensions, including being able to take all or part of their pension pot as cash, buy an annuity to provide a guaranteed lifetime income, or to 'drawdown' an income from the pension pot and leave the rest invested. Since the rules changed in April 2015 more than £30bn has been accessed from UK pension savings, with the latest figures showing that, in 2018/9 alone, over 350,000 pension pots were fully withdrawn.
The changes have placed much greater responsibility on savers to ensure they make the right choices, the Association of British Insurers (ABI) said.
And the industry body argued that further reforms and safeguards are needed, as too many people are making complex and vital retirement decisions without help. According to data from the Financial Conduct Authority, nearly half (48%) of people who accessed their pension pots in 2018/19 did so without regulated advice or guidance.
The ABI report says that full withdrawals have risen to their highest level, while 40% of withdrawals are at an annual rate of 8% and over, which is not sustainable. On average, withdrawing 3.5% from a pension pot each year should ensure a 95% chance of not exhausting savings in retirement, but withdrawing 7% only delivers a 60% chance of not running out of money.
This could be a problem in the future, as more people will be relying on defined contribution pension savings.
Many of the current generation of retirees benefit from defined benefit (final salary) pensions, which provide a guaranteed retirement income while they use other pension savings flexibly, the ABI explained. With final salary schemes in decline, future generations will increasingly rely on pension savings without such guarantees.
Recommendations in the report to help 'future proof' the pension freedoms include enabling pension providers to give more help to customers without crossing the boundary to regulated advice, introducing a later life review, and mandatory risk warnings for people considering transferring out of a final salary scheme.
"The jury is still out on the success of the pension freedoms," said ABI director general Huw Evans. "We will only be able to judge their true impact decades from now, once it is clear whether those who have exercised their choices have the retirement that they were hoping for."