New analysis from Standard Life has laid bare the stark impact differing withdrawal and investment returns can have on pension pots.
According to Standard Life, a pension pot of £100,000 could last anything from a lifetime to just 13 years, highlighting the challenges of navigating retirement and the uncertainty people face when planning for a combination of living costs, investment returns and longevity.
Its analysis looked at two withdrawal scenarios based on a pension pot of £100,000 and a fixed withdrawal of £4,000 and one at £8,000 per year. The analysis explored the impact of different investment returns on the pension pot after ten years, ranging from a return of 8%, 5% and 2%.
After 10 years, those who withdraw £4,000 of their pension each year would have a pot worth between £141,000 if they secured 8% returns and just £70,400 with 2% returns.
For those who withdrew £8,000 each year, their pot would be worth between £83,900 if they secured 8% returns and just £27,800 with 2% returns.
Standard Life also analysed how long the pension pots would last in each of the different scenarios. Those who took £4,000 each year would not exhaust their pot if it grew by either 5% or 8% but in a 2% growth scenario, their pension would last 29 years. In contrast, the higher withdrawal scenario would see both pots run out, with the higher return scenario lasting 28 years compared to just 13 years in the low return equivalent.
Pete Cowell, head of annuities of Standard Life, said: “Pension freedoms gave retirees greater choice and flexibility, but with that freedom came responsibility and considerable financial planning challenges to weigh up.
“While those who accessed their pots for the first time in 2015 may now be taking stock of what remains, many current retirees are also likely to have the safety net of a DB pension to fall back on. However, with DB pensions in decline, and more people approaching retirement with larger, defined contribution pensions, monitoring the balance between withdrawals and investment returns has never been more critical to avoid outliving a pension.”
Cowell said many people are opting to cover their essential living costs with a guaranteed income through a combination of the State Pension and an annuity.
He added: “This approach removes many of the unknowns as you know your core living costs will be met while also providing the potential for investment growth on any pension placed in drawdown.
“With the Pension Scheme Bill expected to legislate for default retirement income solutions we expect to see approaches that blend a combination of income certainty and flexibility become more and more mainstream.”
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