Jan 3: BEST FROM THE BLOGOSPHERE
January 3, 2022
Are Brits drawing down their pension savings at too great a clip?
One of the tricky parts to living off a lump sum of retirement savings is figuring out how much to take out each year.
There are many theories on what the “right” percentage to draw down is, and many experts, such as Dr. John Por who spoke to Save with SPP last year say a perfectly correct number is “unknowable,” since no one knows what future interest rates and markets will be like.
But the general rule of thumb has been that taking out four per cent per year is a “sustainable” number.
That’s why it is surprising to read the news in Professional Pensions that across the pond, 43 per cent of Brits are withdrawing eight per cent of their retirement savings annually – double that rule of thumb.
The figure comes from new research from the Financial Conduct Authority (FCA) in the U.K.
“While you may need to make occasional ad-hoc withdrawals to cover large expenses, making regular withdrawals at this level risks depleting your fund,” states senior pension analyst Helen Morrissey of Hargreaves Lansdown. “If you also experience a period of investment volatility this can further impact your fund as you have no… contributions going in to make up any losses,” she states.
The number of Brits withdrawing at an eight per cent clip jumped from 40 per cent in 2020 to 43 per cent this year.
The article suggests that the pandemic has played a part in people taking more out of their pension savings.
Meanwhile, data from the FCA shows there has been a 13 per cent drop in annuity purchases in the U.K.
This may be, reports The Telegraph because of “a deterioration in annuity rates” thanks to generally low interest rates, and the fact that drawdown “will always give you the highest income” versus an annuity.
The Telegraph article says only an annuity approach guarantees that you won’t “exhaust your pension early.” They suggest a blend of the two options – drawing down some of your money at a sustainable rate, and annuitizing the rest, to ensure that you will never run out.
Save with SPP knows of at least a couple of people who ran out of retirement savings while still relatively young. It’s likely that they didn’t understand the idea that the big pot of savings is supposed to last as long as you do. It’s tempting to be sitting on maybe a hundred thousand dollars of savings, and thinking that it’s time for new windows and doors, or (one day) a vacation, and burning through it. But you’ll miss that money when you’re 90.
The Saskatchewan Pension Plan (www.saskpension.com) allows you to annuitize some or all of your retirement savings when the day comes to put down the shovel and stop working. The SPP’s Retirement Guide outlines all the annuity options you can choose from. And if you have a spouse, the annuity option means that your spouse will receive a lifetime income from SPP should you pass away before they do. That’s the peace of mind that saving for retirement with SPP can bring. Check them out today.
Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.