Can your pension run out of money?

You may be wondering how many years your pension lasts, or whether you can spend all the money in your pension. Managing your income withdrawals and expectations could be a good idea to ensure your money lasts a lifetime.
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Your pension is supposed to last a lifetime, that’s what you’ve been saving for anyway – to make sure that you have enough money to see you through retirement. But that begs the question, can your pension run out? The answer to that is a little bit more complicated than you may think, we’ll explain.

Can my pension run out?

This depends on when you’re looking to retire – at the moment, if you’re eligible for the State Pension then you’ll be able to collect a payment every four weeks. However, despite the State Pension being in place for over 100 years, there are worries that this pot could run dry – the Government Actuary’s Department (GAD) estimate that this may happen as early as 2032.1

You see, unlike a personal pension where you save for your retirement, the State Pension is funded by National Insurance (NI) contributions and run more like a current account than a savings account. This means that it relies on having more people working than not working to be functional, but as the ratio of workers to pensioners shifts, the NI payments will need to increase to keep pace.

In a nutshell, the GAD found that major changes need to be put in place to be sustainable in the future – and one possibility is getting rid of the State Pension entirely.

So, if we exclude the State Pension for the moment, the answer then depends on what type of pension you have and whether or not you’ve bought an annuity.

What is Annuity?

Annuity isn’t a word you’d come across much in everyday language, but it relates to a specific type of pension product which will pay you a regular retirement income. There are two main types of annuity, these are:

  1. Lifetime – you’ll be paid an income for the rest of your life, typically it increases each year in line with inflation and cost of living.
  2. Fixed-term – you can choose a set term to receive an income – usually five to ten years – after which you receive a lump sum to buy another retirement product with or take as cash.

An insurance provider typically offers annuity, and how much you’ll be able to receive as an income will depend on things like your health and lifestyle, size of your pension pot, and your age, among other things.

Some pensions offer a defined benefit, which works similarly to a lifetime annuity scheme, in that you’ll receive a secure income for life which increases each year. The key difference is that how much you get will be impacted by how long you’ve been a member of the scheme and your salary at retirement. It’s worth noting that you can’t buy a defined benefit pension as they’re usually workplace pensions arranged by your employer, but you could choose to buy a lifetime annuity.

How long will my pension last for?

Think of your personal pension as a large piggy bank – if you smash it open and spend it all at once, then it’ll run out pretty much instantaneously. But if you take your time and only take a little bit from it at a time, then you can make it stretch a lot longer.

Most pension calculators you find will base your income on living the average life span – in the UK this is currently 81 years.2 This means that if you choose to retire at 55, then your pension would need to stretch out for 26 years. If you retire at 66 (the current State Pension age), however, your pension will only need to last for 16 years – and so on . It may not be the cheeriest of subjects, but the earlier you leave work the longer you have for your pension to run out. On the flip side of this, the longer you stay in work for, the more you have to save.

As we’ve explained, the State Pension currently doesn’t kick in until you’re 66 (or older - find out your state pension age here). So, when thinking about retiring early, you’ll want to factor this in to your calculations. However, one thing to bear in mind is that the State Pension age is subject to change and for those who were born on or after April 1960, it’s due to gradually rise to 67 between 2026 and 2028. And that’s not all. It’s also expected to gradually rise to 68 (for those who were born on or after 1977 between 2044 and 2046.3

Knowing when you want to retire is an important part of figuring out how much you may want to save. But it’s also worth understanding what’s considered a ‘good amount’ to have in your pension – after all, no two people are the same, so why should our pensions be?

What if I take 25% tax-free?

You might know that with a personal pension you’re able to withdraw 25% of it tax-free on your 55th birthday if you wish. And while that could be tempting (who doesn’t like receiving a big sum of cash?), it might not be the right thing for everyone to do . Taking 25% early could cause your pension to run out much sooner than you may have planned for.

It’s worth noting that you don’t have to take the full 25% in one go – you could choose to withdraw a smaller chunk, take multiple payments, or even spread it. Whatever option you choose, it’s important to check you’ll have enough money for the future.

Planning your pension drawdown options

The last thing you want is to be scraping to get by when you’re old. You probably want a comfortable retirement with a few trips abroad and very few financial worries. Nobody wants to be counting out their change to see if they can afford their weekly shop – unless that’s your thing, then go for it.
Pension drawdown, the term used for taking an income from your pension pot, and most pension providers give you a lot of flexibility in how you receive this money. With a personal pension, for example, if you want to, then you can take 25% of your pension pot out as a tax-free lump sum the day you turn 55. Now, of course, there’s pros and cons to doing that – one of the downsides is that, if you’re not careful, it could make your pension run out faster.

Understanding how much you want to draw down is important, as ultimately it dictates how long your pension will last for. Now, while you may think that you’d like to have your current salary when you retire, it’s worth noting that your costs may have dropped by then. For example, if you have a mortgage that will typically be paid off by the time you retire, your commuting costs will also be gone, as too will your NI payments.

Choosing how much you want to drawdown will depend on the size of your pension pot, your financial requirements, and how old you are. If you’re not sure whether you have enough saved up for a comfortable retirement, then it may be worth talking to an independent financial adviser.

Planning your pension savings

One way to build up a pension could be to get an early start on making contributions to it. You see, the sooner you start, the more time you have for compounding to work its magic. Compounding is what happens when your investments earn profit which is then reinvested and able to make profits of its own. The longer this goes on for, the more potential it has to grow.

But there’s more to starting early than just compounding. As we briefly mentioned above, the longer you leave your pension for the more time you have to save into it — the same works at the start. And if you really want to maximise your time, you could start paying into your pension sooner as well as retiring later – even five years difference could have a significant impact. If you start paying into your pension at 25, rather than 30, then your money has five more years where it can benefit from compounding, market movements, and additional contributions. Plus, starting earlier often feels less daunting than the idea of retiring later.

If you’re looking for a pension that puts you in the driving seat, then check out Wealthify’s Personal Pension. You can start an account with just £50, choose how you invest, whether you invest through our Ethical Plans or Original Plans , and how you contribute. Being tied to how much you pay in can be difficult and doesn’t always fit with your lifestyle. At Wealthify, you have flexible payments, letting you adjust your contributions to fit – think of it as a pension designed for real life.

The tax treatment depends on your individual circumstances and may be subject to change in the future.

As with all investing, your money is at risk. The value of your portfolio can go down as well as up and you could get back less than you put in.

You should seek financial advice if you are unsure about investing.

  1. https://www.ftadviser.com/pensions/2018/05/16/bid-farewell-to-the-state-pension/
  2. https://www.macrotrends.net/countries/GBR/united-kingdom/life-expectancy
  3. https://www.which.co.uk/news/2021/12/increase-in-state-pension-age-to-68-could-come-early-will-your-plans-be-affected/
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