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15 Feb 2017

Common mistake could leave millions of pensions in peril

A new report published this week raises serious questions about the longevity of millions of people´s pensions, as it was revealed that a significant number of pensions ran the risk of running out all together before retirement, all due to people following an inaccurate rule.

Aegon, the company responsible for the research, examined the reasons why so many people withdraw money prematurely from their pension pots. The report found that more than half a million people had taken over 15 million flexible payments from their pensions.

While at first glance this is a positive statistic, as it illustrates the need for pension flexibility as well as the fact people are confident enough to take risks, it does signify a more telling concern. Only one in five people over the age of 50 have a financial adviser, as a result it follows that the majority of these transactions are done without the advice of one.

To deconstruct this further, it is important to note the popular ‘rule of thumb´ drawdown. This is a concept that was first conceived in the US in 1994, wherein it stated that if you leave your pension to the whims of the stock market, you could withdraw the equivalent of 4% of your pension every year without running out of money.

Two decades on and the rule is terribly inaccurate. Since then, interest rates have dropped exponentially, resulting in lower returns on risk each year. Ageon calculated that a 65 year old entering drawdown in a low risk portfolio and taking 4% a year, now has a one in five chance of running out of money by the time they reach the age of 95. Which, given the developments in medicine and increasing life-expectancy, could spell trouble for many individuals.

Copyright M2 Bespoke 2017

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