What will happen if people spend their pension pots too quickly and run out?

[CurlyhairedAssassin]

I'm approaching 50 so thinking ahead to retirement and reading up about annuities and drawdowns etc. I think I'll be ok myself but I was wondering what will happen now that people have more freedom to use drawdown on their pension pots instead of buying an annuity (I know rates on those are pitiful now so people would be more drawn towards the draw down option).

What's to stop everyone being ostriches and assuming they won't be around when they're 90 and therefore having a spend, spend, spend mentality? What would happen in the future if millions and millions of people have exhausted what's in their pension pots by age 85/90 and need expensive old age care? I can't see how it would be affordable for tax payers...

Probably the same as the millions of people who get to retirement without having paid into a private pension. They'll either have have a very frugle life on state pension, sell assets or rely on relatives. Basic care needs will be met by NHS/tax payer, but that's nothing new.

Basic pension and benefit top up - thousands of people will live like this - as pp said - not everyone has a private pension - you won’t starve. Think of this - my Aunt spent her last few years in a care home paying thousands of £ for the privilege. She lived with others that just had a basic pension - they were all treated the same.

I get that the same care home NOW might be made up of people who pay thousands for their care and others who don't pay anything, but when there are fewer people who DO have private pensions and fewer people who own their own home able to sell it (as buying your own home has become unaffordable for many now), and families are living in smaller and smaller homes so nowhere to put granny anyway even if there was someone around during the day to care for them (because no-one can afford to work part time or be a SAHP). When private healthcare and dental insurance payments will become essential because the NHS has imploded, and mortgage payments are through the roof, where we will get this giant public purse to enable all this vitally essential social and elderly care?

I try not to think about it too much as I find it really worrying, but it's hard not wonder what my own teenagers' lives will be like compared to many of their grandparents' generation. The funding burden will fall on them.

Martin lewis on MSE, says that it is more likely the other way round…people overestimate how long they’ll live for and don’t spend enough, or live too frugally. People assume that if average life expectancy is 83 currently for women, they’ll likely live to 83. Well no, 50% will die before reaching 83. And this is based on life expectancy for a child born now. And life expectancy numbers are falling in last few years.
If you live in deprived area you’re life expectancy is lower and vice versa

However, my bigger worry is how the hell do those with poor financial literacy even figure their way through annuity vs draw down with the pittance they will have in the funds, especially when the financial companies have taken their fees off. It is outrageous…NI should have been raised and state pension increased, not making people pay into personal funds and absorb all the risks themselves. Too many politicians with large investments to make money off the back of doing this. 😡😡

The same that would happen if millions of people with endowments lived longer than expected. The endowment funds would collapse with the same result.

The same that would happen if people didn't save into pensions in the first place.

The public pick up the bill via tax/borrowing as such people will end up reliant on state benefits.

@Aprilinspringtimeshower

Martin lewis on MSE, says that it is more likely the other way round…people overestimate how long they’ll live for and don’t spend enough, or live too frugally. People assume that if average life expectancy is 83 currently for women, they’ll likely live to 83. Well no, 50% will die before reaching 83. And this is based on life expectancy for a child born now. And life expectancy numbers are falling in last few years. If you live in deprived area you’re life expectancy is lower and vice versa

However, my bigger worry is how the hell do those with poor financial literacy even figure their way through annuity vs draw down with the pittance they will have in the funds, especially when the financial companies have taken their fees off. It is outrageous…NI should have been raised and state pension increased, not making people pay into personal funds and absorb all the risks themselves. Too many politicians with large investments to make money off the back of doing this. 😡😡

Trouble is that huge numbers of people don't pay NIC. So the burden of increasing NIC would fall on a pretty some proportion of the population, i.e. those working and earning between the lower and upper NIC thresholds on each job.

Loads of people live on dividends, pensions, property letting, foreign income, so don't pay NIC.

Loads of people on benefits don't pay NIC.

Loads of part-timers don't pay NIC.

NIC needs scrapping and replacing with a higher rate of income tax so everyone pays it.

small not some

As above, live frugally and get a job for your retirement. Probably not live as long due to the likely lower quality of life from being broke too.

Personally I'm thinking we will have robots taking care of us in the future care homes as per current developments from Japan. If you can pay for care maybe it will be done mostly by humans.

@Aprilinspringtimeshower

Martin lewis on MSE, says that it is more likely the other way round…people overestimate how long they’ll live for and don’t spend enough, or live too frugally. People assume that if average life expectancy is 83 currently for women, they’ll likely live to 83. Well no, 50% will die before reaching 83. And this is based on life expectancy for a child born now. And life expectancy numbers are falling in last few years. If you live in deprived area you’re life expectancy is lower and vice versa

However, my bigger worry is how the hell do those with poor financial literacy even figure their way through annuity vs draw down with the pittance they will have in the funds, especially when the financial companies have taken their fees off. It is outrageous…NI should have been raised and state pension increased, not making people pay into personal funds and absorb all the risks themselves. Too many politicians with large investments to make money off the back of doing this. 😡😡

Eh?

Why should the state absorb all the risk, what happended to personal responsibility?

@fromdownwest Why should the state absorb all the risk, what happended to personal responsibility?

Because it's what the people want apparently in civilised society. There are always howls of anguish whenever it's suggested that benefits are reduced/withdrawn. No one wants anyone to be left penniless/destitute, however much that person has contributed to their own downfall. What about the howls of anguish whenever it's suggested that charities take more responsibility for people in difficulties - they say it's the state's job to look after people, not charity!

If you're 50 and looking into it now, chances are you will have enough. When you start getting closer you can speak to an IFA or read up on general advice about what % draw down is sensible,mot ensure the money doesn't run out.

Remember , at state pension age, hopefully you get some if not a full state pension and that's worth over £9k per year. Often people are interested in drawing down more before that to fund the gap between retiring and receiving the state pension....assuming they stop early.

Some people who find they draw down too much too quickly (and some will splurge) will manage by downsizing their property and releasing some cash. They might also reduce what they had hoped to leave as inheritance.

Of course, lots won't own a home and their pots that they draw down from will be very small to start with. Some of these people might be more likely to splurge as they can see the cash won't last long, so just want to enjoy it for a short period. A that point, they might have some state pension (or not) and it will then be benefits, with a pretty measly life.

It is true that the state funds care homes for those who can't. But do remember a relatively small proportion of the population actually go into homes. Having savings always gives people more choice about the home they go into and also more flexibility about services provided whilst they are still in their home.

Most of those who haven't provided sufficiently for their retirement or splurged the but if retirement income they had, or misjudged and drawn too too much too fast, won't be living it up at taxpayer expense in a luxury care home. Instead, they will be living in accommodation that is unlikely to be the best quality and having to watch the pennies and life a pretty miserly life becaue their benefits worn allow anything else. I wouldn't envy them and I wouldn't think imagine they are all laughing from expensive care homes that they haven't paid for. Instead, you're looking at many years in cold flats or houses, worrying about the heating bills and not being able to afford to do much.

£20k per year is considered enough for a reasonabke retirement for a couple and about £27k for a more comfortable retirement. Most pension pots won't deliver anywhere near that, but a couple who have always worked should be able to get £18k from the state pension. But there is a ticking time bomb of all those who are paying minimum amounts into auto enrolment pensions, who will have very little in old age in their private pensions.

At 50 there's still time to save big and make a big difference.

As I said, Wombat, I myself will be ok. I'm quite personal finance-savvy, fairly frugal but will take calculated risks, personal circumstances mean I should have a decent retirement etc. It's more that I have no knowledge of economics and can only see the state's burden getting bigger and bigger, with little to pay for it. Perhaps the robot carer idea will indeed become a reality. Christ....

It’s why it’s called a ticking time bomb and why people worry that by the time they reach retirement age, state pension will have become means-tested to some degree, as the government will need to claw back much if the state pension payments to fund those who cannot fund themselves. Most people who qualify (having paid in for it) for full state pension (currently needing 35 years of contributions) also have some level of private pension.

I think the government have said they will always give 10 years notice of changes. They won’t spring it in you, but if you get a big change just 10 years from retirement, it can scupper your plans, as 10 years isn’t that much in retirement terms.

So, the age for state retirement is being increased for those currently around 45+ to 68 instead of 67. That’s a year less the state will have to pay out for. Younger people won’t get it until older and 70 looks likely for those younger still. Additionally, people younger than 48 won’t be able to access their pension pots until 58 instead of 55. This will keep people working a bit longer in some cases and also paying tax and NI.

The time when it is going to become a really serious problem is when the generation who never afforded to buy a property retire….their rent will need paying through retirement.

It is a massive burden on the state. But also, it’s worth remembering that the standard people will be maintained at won’t be impressive. Those with private pensions and properties and savings will have a much happier old age.

So, the age for state retirement is being increased for those currently around 45+ to 68 instead of 67. That’s a year less the state will have to pay out for. Younger people won’t get it until older and 70 looks likely for those younger still.

I think it’s actually under 44 (for women) that you’ll have it raised to 68 on current legislation. Just checked cos I’m 44 and you had me worried!

But there are moves to bring it forward. The proposal is to between 2037 to 2039. This will be formalised anytime soon, but has been on the cards and mentioned for several years now.

This is from the gov site re: proposed changes:
Between 6 April 1970 and 5 April 1978
Your State Pension age is currently 67. It would increase to between 67 years and 1 month, and 68 years, depending on your date of birth.

So you guess mine could be moved to 68 but more likely 67+9 months or whatever. If you’re 43 now (1978 D.OB.) them definitely 68, I guess.

It’s all a bit shit! But if I can sneak in under 68 that’s be nice.

@Curly by the time you get to that point HMGovt will have introduced mandatory euthanasia for the poor, disabled and anyone who cant afford to look after themselves.

You seem to be assuming that millions of people who have saved diligently for their old age will suddenly act like idiots and squander their hard earned pensions on fast motorbikes and cruises.

Not sure where you get this idea from - as PP said, evidence is that people don't spend their savings on themselves in old age and live more frugally than they need to. As someone working with the elderly I see an awful lot of that - people refusing to pay for care or carrying on driving when it's outright dangerous because taxis are expensive.

I'm 39 and I constantly wonder when I can retire. There is no way I will work till 68, I'd rather starve or freeze to death before then but for now my youngest is only 6 so perhaps when I've seen her through uni.

So I have numerous spreadsheets to figure out the magic number, various drawdown and investment returns and inflation assumptions or future interest/annuity rates. Unfortunately I don't think anyone in the world has that visibility to work that out mathematically on a private pension (unlike a public sector one that can mostly guarantee you an annuity-like amount till death). I also don't know if DH or I will be made redundant in the future, have health issues, will get a heart attack at 60 or 70 or 90, will need nursing care or not... so the only way is to save as much as possible without infringing on our enjoyment of family life today.

NoSquirrels….yes, you aren’t likely to be fully 68, but also not to get it as soon as you hit 67 either. It will be several months later, depending on exact age.

Bear in mind, for those wishing to draw down some private pension to fund early retirement, that the age is increasing from 55 to 58. Anyone who is currently 48 and was 48 before April will get away with it and be able to drawn down at 55 still, as long as they start doing so before that April. After that cliff edge, people have to wait until 58 to draw down. This will mean a good number can’t retire at 55 but have to wait until 58. (And I realise that retiring at both 55 and 58 is a great luxury and most won’t be able to stop work then anyway). People wanting to stop in their 50s before 58 who are currently younger than 48, might manage by saving into finds they can access anytime, such as ISAs or non-pension investments. As with all of it, it requires being aware of any legislation which might affect you, the tax implications of different savings mechanisms and planning ahead for different phases of retirement after stopping work.

I’m thinking about retirement in 3 phases - before 60, when I can’t/don’t want to be drawing on any pensions so need other sources of income, from 60-68 when I will be able to claim the final salary part of my public sector pension, 68+ when I will be able to add the career average part of my public sector pension and state pension to that I’ve been claiming since 60.

I need to ensure there are funds available from about 55 ish when I hope to stop work, and to a lesser extent from 60. These funds will bridge my gap to when my pensions are all fully paying out. I plan to use ISAs and also the large lump sum that my final salary pension will pay out at 60.

My state pension will pay out at 67 plus a number of months, but I’m working on it being 68 for simplicity of planning. I do have a SiPP as well as my private workplace pension and I could just squeal into accessing it at 55 if I wanted to….but I hope not to, but that option will be there if need it.

I have never had high paying jobs not even worked full time most of my working life. The things that have helped me have been paying into a public sector pension (even as a part timer) since starting work in my early 20s, and over-paying the mortgage so it could be cleared in early 40s and then using that surplus to fund ISAs and SiPps, as well as a reasonably careful lifestyle. Lots of people are not not very money savvy,but it’s easier to become more aware these days with the internet being an amazing resource and a couple of evenings reading up can boost knowledge about all kinds of things.

For those who are worried, it’s never too late to make some kind of difference. Ultimately you need to be prepared to sacrifice a little more today in order to have more in future, but even smallish sacrifices can make a difference, and all the more if you do make them when younger.

Wombatchocolate I very much appreciate your words and often read them. Keep your solid info coming please. At 49 it is very much in my mind. Trying to work out the number needed or indeed wanted, and with sixteen years olds is a challenge.

@WombatChocolate I like your planning for phases of income. I'd probably plan some phased outgoings too. In my experience, people spend more in their 'active retirement' years, say up to age 75, replacing cars, going on holiday, moving house or making amendments to existing homes etc. After 75-ish (depending on wealth, health and to some extent, companionship with a similarly-able person), spending slows right down until aged around 80, when income tends to exceed outgoings - at 75 my Mum was going on trips to the USA, at 85 she finds it almost impossible to spend her tiny income, even with paying for a bit of help in the house.

I also think that for the younger generations, there will be a huge amount of wealth trickling down from inherited property so their home ownership journey will look very different to my generation

From my reading, and looking at our spending, £2k net per month would do us as a couple. £2.5k is what we are targeting - so that’s £30k after tax. We are mortgage free.

I suspect £2.5k will actually be quite a bit more than needed and so rather than running down the reserves, we will actually continue to save a little bit each month. £2.5k is quite a bit less than we have coming in at the moment each month and I think lots of people look at the suggested figures for pension income and don’t think it will be enough…..but from our extra income, a significant chunk is going into pension contributions for 2 of us each month, plus of course we pay much more tax and national insurance. Additionally we save for things like university. By the time we draw our pensions, all of these expenditures will be gone apart from an tax bills but that will be far far less. So actually, working out the costs of all the monthly bills, food shopping, leisure spending, funding cars and holidays are what you need to do. Most people will need access to some chunks of money at different times….to buy a new car or to do a major maintenance job in the house. You have to consider if you’ll find these from pension income (so little bits out aside each month) or if you’ll have some lump sum savings which are always there to draw on, when you might need £Xk for the replacement car. The same could be said for holidays especially if you want big expensive ones….Willy hat be funded from monthly Kensington income or some lump sums you have.

No one wants to be hard up in old age. Most people suggest that if you retire in early 60s, you are likely to want to do 10-12 years of big holidaying and spending and after that it declines a bit. Of course there are always those who continue with extensive travelling well into their 80s and 90s, but by 80 most aren’t travelling so extensively.

Personally I’m not trying to factor in care home fees. Firstly, in reality only a small proportion of people go into care homes and those who do find the costs are so substantial that they are rarely funded by pensions but by drawing in savings and then selling property. No one wants to do this, but if it’s needed, it’s needed and will have to happen. I really don’t think that when care home fees can be over £100k a year, trying to establish a pension to lay that amount makes sense….it’s so far from what is achievable for over 99% of the population and a bit of a red herring int eras of thinking about pensions.

People are different. Some will still need to pay mortgages and with people having kids later, lots will still be funding uni or providing financial support in one form or another. Others will be renting, with that bill stretching ahead indefinitely or planning to continue to lease cars and pay o they for those.

Cross post Defiantly….yes, we are thinking on the same track.

Yes, we will probably receive some kind of inheritance at some point. We haven’t factored it into any of our calculations though as any timing and any amount is unknown….and we are aware that our parents might need care in a home and assets might be largely wiped out. And we’ve never wanted to feel we were keeping an eye on our parents assets with a view to getting them, if you know what I mean.

I think about retirement planning phases in terms of the different spending in different phases of retirement. As you say, there is an age when many retired people do t spend much at all. It’s hard for the early 50s person looking forward to an active retirement to imagine that phase…but it’s the reality for most. That desire to replace the kitchen and globe trot does drop off. For me, the big phase thinking is about pulling it bye money and funding retirement phases. With many pensions and state pension not paying out until late 60s, but many wanting to retire in 50s or early 60s, there is a funding gap. Covering that with the £2k or whatever you need per month from other sources is the key…and that’s where the ISAs or other savings or private pensions which can be drawn down from 55 or 58 come in.

I have actually enjoyed thinking about all this and looking into it. Like lots of others, I have found that by knowing my ‘number’ that I need and thinking about what is already building up and when it can pay out or be shifted around to adjust its availability, I can retire about 5 years sooner than I thought and my DH can also stop sooner. Yes, we could keep working longer and have bigger pensions, but our verdict for us is that we won’t do that. In our late 50s there will be enough to meet our number which will enable us to do what we want to innreturement perfectly happily. And the key for us is we will be young enough to o enjoy it hopefully. None of us knows how long long we have left, but few people lie in their death beds and wish they’d spend more time at work.

Thanks, Wombat, I'm sure what you've said is food for thought for a lot of us.