Tom Selby, head of retirement policy at AJ Bell, comments: “The rise in the number of people accessing their pensions for the first time will inevitably spark fears of savers raiding their retirement pots to make ends meet during the cost-of-living crisis.
“Anyone accessing their pension earlier than planned or taking bigger withdrawals in order to cover higher living costs needs to think carefully about the impact this will have on the sustainability of their retirement income plan.
“While in some cases savers may feel dipping into their pension is the only option, it’s important to take the time to consider how decisions taken today will impact on your finances further down the line.”
Sustainability is the key
“The FCA’s data suggests 4-in-10 regular withdrawals in drawdown were at an annual rate of 8% or more in 2021/22, down slightly from 43% in the previous year.
“Whether or not this withdrawal rate is concerning will depend on the circumstances of the individual, their health, age and the investment returns they enjoy. For example, someone who has a guaranteed defined benefit (DB) pension that covers all their living costs might be perfectly comfortable taking large withdrawals from their SIPP.
“Equally, someone who is accessing their pension later in life – for example in their mid-70s – should be able to withdraw a higher amount sustainably than someone who starts taking an income from their 60th birthday.
“The key to making drawdown work is to carefully consider the sustainability of your withdrawal plan, understand and be comfortable with the risks you are taking, and review your strategy regularly, ideally with a regulated adviser. If your investments hit the skids, particularly in the early years of retirement, you might need to tighten your belt to keep your withdrawals on a sustainable path.
“Similarly, if your investments deliver large returns then you might be able to withdraw a bit more. But for drawdown to work, you need to stay engaged – sticking your head in the sand and hoping for the best is not an option.
“As a very rough guide, experts usually say a healthy 65-year-old can safely withdraw between 3-4% of the value of their fund each year and be confident it will last throughout their retirement.”
The return of annuities?
“All retirement income options saw a surge in popularity in 2021/22, including annuities. Annuity sales have fallen off a cliff over the last decade or so, in part as a result of the paltry rates on offer and in part because of the popularity of the pension flexibilities introduced in 2015.
“Rising gilt yields has boosted the annuity rates insurers can offer, which in turn should make annuitisation a more attractive option. It is vital for UK savers that there are both healthy annuity and drawdown markets, so the rise in annuity sales and recent improvement in rates is good news.
“All-too-often retirement is presented as an ‘either/or’ choice between annuities and drawdown. In reality, the right option will generally be a combination of both. For example, you could use an annuity to cover your fixed costs in retirement, while retaining flexibility and the opportunity for investment growth with the rest.
“The annuity rate you can get also tends to get better as you get older, so it can make sense to opt for a flexible income when you’re younger before shifting to an annuity in your 70s or 80s. The key is building a retirement income plan that fits your needs and lifestyle.”
