Thousands of retirees are at risk of exhausting their savings in later life due to excessive withdrawals from their pension pots, a recent report has highlighted. According to findings from Legal & General (L&G), many pensioners are depleting their funds up to a decade too early, which places them in a precarious financial position during retirement.
This phenomenon has been referred to as the “lottery effect,” where retirees treat their pensions as a windfall rather than managing their withdrawals with a long-term perspective for financial security. On average, individuals begin accessing their pensions at the age of 60, often opting to withdraw the maximum allowable 25 percent tax-free lump sum all at once.
By the time they reach the state pension age—currently set at 66 for both men and women—they are typically withdrawing around £875 per month from the remaining balance. However, with an average pension pot of only £87,500, many retirees are on course to run out of funds by the time they hit 77, even though the average life expectancy for a 60-year-old in the UK is approximately 86 years.
Katharine Photiou, the managing director of workplace savings at L&G, emphasized that these findings underscore a growing issue in the UK, where a significant number of retirees lack additional financial resources such as property or defined benefit (DB) pensions to rely on. As a result, they risk becoming dependent solely on the state pension, which currently amounts to £11,502.40 annually.
Photiou advised, “For anyone nearing retirement, proactive and early planning is crucial. Take the time to assess your overall savings, including any other income sources such as property wealth. Understanding your complete financial picture will enable you to strategize for the retirement you desire and help identify how your savings can assist you in achieving that goal.”
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One concerning trend is that many retirees are making significant financial decisions without the benefit of professional guidance. More than half (58 percent) of those surveyed admitted to accessing their pensions without consulting a financial adviser or utilizing free guidance services such as MoneyHelper. Among those who expressed regret over their withdrawals, one in ten stated that they did not fully comprehend the long-term ramifications of their choices.
Experts indicate that “the lottery effect” can create a psychological high, provoking impulsive or unsustainable spending patterns, akin to the experience of winning a lottery. For some retirees, this leads to altered financial planning, with one in seven (15 percent) reporting that the cash lump sum from their pension felt like an unexpected bonus, rather than a component of their long-term savings strategy. Additionally, one in ten (10 percent) described it as a payday, leading them to want to spend the money.
Many retirees have used their lump sums for home renovations, assisting family members, or vacations, only to later realize how quickly these funds have dwindled. However, over a fifth (22 percent) indicated that they chose to withdraw a cash lump sum or were considering doing so because they wanted to set it aside in a current account or cash ISA for emergencies. This approach raises concerns about potentially incurring unexpected tax liabilities or loss of eligibility for means-tested benefits, such as universal credit and pension credit, while also missing out on the potential benefits of keeping their pension investments intact.
Another factor prompting retirees to access their pensions could be the announcement from Rachel Reeves regarding the Budget, which stipulates that from April 2027, unused pension savings may be subject to inheritance tax (IHT), as noted in the report.
There is a wealth of free support and guidance available, such as online calculators that can help provide a clearer understanding of potential retirement income. Additionally, Pension Wise offers complimentary, impartial guidance for individuals over fifty.
Tips for Boosting Your Pension for Retirement
If you are concerned about whether your savings will last throughout your retirement, consider the following recommendations from Photiou on how to enhance your pension pot:
- Start early – The earlier you begin contributing to a pension, the more time your investments have to grow. It’s never too early to start, and it’s also never too late to begin.
- Maximize your contributions – Check if your employer offers to match contributions beyond the minimum requirement. This is essentially free money that can significantly augment your pension.
- Track down lost pensions – If you’ve worked multiple jobs, it’s possible you have pensions with different employers. Locating and consolidating these pensions can streamline your retirement savings management.
- Delay accessing your pension – Postponing the start of your pension withdrawals can lead to a larger payout, as your pension pot has more time to accumulate growth.
