16th February 2015
Retirees planning to rely solely on drawdown to generate an income in retirement have a 50% chance of outliving their fund, MGM Advantage has warned.
The retirement specialist’s analysis shows that if, at age 65, somebody decides to use drawdown to match the income their pension pot would generate through an annuity, there is a 50/50 chance they will run out of money before they die.
When an individual uses their pension pot to buy an annuity, they have the comfort of receiving a fixed income for the rest of the their life but on the downside annuities have long been considered poor-value.
On the other hand, those who opt for income drawdown remain invested in the stockmarket and while it gives them the chance to grow their nest-egg while taking an income, if markets go sour, they risk enduring some heavy losses.
In its analysis MGM Advantage considered the case of a 65-year-old man with a £100,000 pension pot.
He could generate an income of around £6,000 a year from an annuity and that income would last for his entire lifetime, no matter how long he lives.
By comparison, if he took the same annual income using drawdown – assuming 5% annual investment return after charges, he has a 49% chance of living until 92 at which point his money would run out.
Andrew Tully, pensions technical director at MGM Advantage, commented: “With the new pension freedoms, the choices at retirement will get a whole lot more complicated. There is a lot of talk about using drawdown, but retirees need to be made aware there is a real risk that their money could run out early.
“While many people may think they won’t live long enough to worry about their money running out, the statistics show this is not true. Healthy people approaching 65 have a 70% chance of being alive at age 86, which is average life expectancy, and a 50% chance of living to 921. That’s like flipping a coin to find out if they will run out of money in retirement.”
Tully asserted that most people want to secure a sustainable income that is guaranteed to pay the bills, which is where a blending approach comes, in using an annuity to pay the bills and then using drawdown or other options for spare cash.
“This is both tax-efficient and sensible from a planning and peace-of-mind perspective,” he adds.