Drawdown disaster – pensioners running out of cash after raiding savings to make ends meet

Martin Lewis compares pension annuity against drawdown

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In 2015, the Government scrapped the obligation to buy a poor value annuity at retirement, and said the over 55s could simple take cash from their pension savings instead to spend as they liked. As former Pensions Minister Steve Webb famously remarked at the time, they could blow the lot on a Lamborghini, if they wanted.

Everybody thought pension freedom reforms were a great idea – except for me. I felt like a voice in the wilderness, warning that allowing people to use their pension as a cash machine would backfire.

While annuities have been paying dismal income for years, at least that income was guaranteed to last for life.

These days most new retirees leave their pension funds invested in the stock market via income drawdown and take cash as needed. But with drawdown, there is no income guarantee.

If you blow all your money – on a Lamborghini or anything else – then your income will stop for good.

Once it’s gone, it’s gone.

That means people who overspend in the early years of retirement could have nothing left for later life.

They will have to fall back on the state to survive, so the hard-pressed taxpayer ends up footing the bill for their profligacy.

Nobody listened to me, and in the early years of pension freedom reforms, it seemed like I had got it wrong.

Thankfully, most over-55s didn’t rush out to blow their pension pots on a Lamborghini, or any other flash car, for that matter.

They handled their new freedoms sensibly. Yet slowly, surely, I can see all the dangers I warned about coming to pass.

Even before this year’s cost of living crisis, pensioners were drawing down their savings at a dangerous rate.

A financial advice rule of thumb states that if you draw four percent of your pension pot each year as income, it will never run out.

Last year, almost half the people in drawdown took more than eight percent of their pension instead. That’s DOUBLE the safe withdrawal rate.

Withdrawals on that scale would reduce a £100,000 pension pot to just £20,000 after 10 years, leaving little for later life.

Even if it pot grew at three percent a year, withdrawing eight percent will reduce it to £40,254.

Now there is another danger. The global economy is under incredible pressure right now, as inflation skyrockets, war rages and central bankers hike interest rates.

So far, stock markets have stood firm, but a crash could happen any day.

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Income drawdown has yet to be tested by a full-blown stock market crash. Central bankers have raced to save investors in every crash this Millennium, but now all the stimulus is used up. 

That could spell disaster for pensioners in drawdown, because the value of their savings could plummet in a crash.

While any annuity income will continue, drawdown pots could be seriously depleted.

Pensioners are already having to make bigger withdrawals, to cope with the cost of living crisis.

If markets crash, they face a double whammy.

Pension freedom reforms were always going to be risky, but those claiming they have been an unmitigated success were premature.

They have yet to be tested properly. That is about to change.

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