Retirees in drawdown failing to calculate how much they can afford to take

Thousands of retirees shifting their pensions into drawdown are failing to calculate how much they can afford to take from their pot, putting them in danger of potentially draining their savings too soon, according to research from Zurich.

Four years on from the introduction of Pension Freedoms, over 435,000 people have shifted their pensions into drawdown. Despite this, just a third of retirees in drawdown calculated how much income they would be able to generate from their pot before retiring.

Furthermore, Zurich found that a third of retirees calculated how much money they would need to cover day to day living expenses and again, just a third took into consideration how long their pot would need to last, whether that be 20, 30 or 40 years. However, just 22 per cent estimated how much money they would need to fund leisure activities, such as going out for dinner and travelling.

Zurich highlighted that retirees adopted this method of planning in their investment strategy, too. Only 16 per cent decided where they would invest their drawdown funds to achieve the desired income and as few as 17 per cent decided what strategy they would use to withdraw income, be that selling units of investment funds or shares, or living off the dividends and interest and leaving the underlying investments untouched.

Commenting, Zurich head of retail platform strategy Alistair Wilson said: “Many retirees in drawdown are relying on blind luck to make their savings last throughout retirement. But by taking simple steps to work out how much they can afford to take from their pot, savers can avoid withdrawing too much, too soon. Setting a sustainable level of drawdown income in drawdown can be something best done by speaking with a financial adviser, or getting free guidance from Pension Wise.”

The firm noted that this lack of planning will not only impact retirees themselves, but it also has consequences for those inheriting the wealth. Just 19 per cent of retirees in drawdown have ensured that their partner has the financial knowledge and understanding to continue managing their investments, and only 15 per cent of retirees have put a financial plan into place if they or their partner were to pass away.

“Many people don’t like talking, or even thinking, about themselves or a loved one passing away. However, to pass wealth efficiently and not leave loved ones swamped by complex financial decisions it’s important that those set to receive inheritance are engaged with financial conversations from the outset,” Wilson concluded.

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