4 in 10 retirees alter pension withdrawals as inflation surges and recession looms

Four-in-ten retirees drawing an income from their private pension are changing the amount of money they take from their pot in response to the double whammy of struggling markets and the rising cost of living.

The data comes from a survey carried out by investment platform AJ Bell Youinvest with over 1,000 of its customers that draw an income from their pension*.

It shows that the majority (60%) have not changed the amount they’re taking from their pension amid the prevailing uncertainty and rising inflation.

But almost a quarter (24%) have made the decision to reduce the amount they’re taking out of their pot, which could help protect the longevity of their savings in the face of weak market returns.

A further 16%, however, have chosen to increase their income withdrawals, with the most likely reason being the rising cost of living.

Falling markets combined with large withdrawals in the early years of retirement can have a damaging impact on pension drawdown investors through a process sometimes described as ‘pound-cost ravaging’.

“With inflation predicted to hit an almost unthinkable 13% in 2022 and the energy price cap expected to leap well beyond £4,000 for the average household in January next year, the cost-of-living crisis is forcing millions of Brits to revisit their spending plans and lifestyle.

“The effects are clearly being felt by those drawing an income from their retirement pot too, although the way people respond will vary depending on their circumstances.

“The majority (60%) appear to be taking a ‘keep calm and carry on’ approach by maintaining their withdrawals at the same level as before the crisis hit. However, almost a quarter (24%) are retrenching by withdrawing less money, while 16% are withdrawing more than previously.

“All of these approaches could be perfectly sensible depending on the individual’s circumstances – the key is ensuring you have enough money to fund your lifestyle while keeping your withdrawals on a sustainable path.”

“Clearly as living costs rise many people will feel they need to increase pension withdrawals to maintain their standard of living. For anyone going down this route, sustainability needs to be front-and-centre of their thinking.

“There is a danger hiking pension withdrawals will turn a sustainable plan into an unsustainable one. This risk will be exacerbated if large withdrawals are combined with market falls.

“Reducing withdrawals or pausing taking an income might be necessary to mitigate this risk, and we saw many people take this option as lockdown hit and markets tanked in 2020. In fact, in the second quarter of 2020 flexible withdrawals were down 17% versus the same quarter in 2019, reflecting the sensible approach taken by many in the face of market uncertainty.

“The most important thing is that people who choose to keep their money invested while taking a retirement income are engaged and review their strategy regularly. This should happen at least once a year, and certainly whenever anyone makes changes to the income they are taking from their pot.”

*data collected by AJ Bell Youinvest with 7,733 customers, including 1,128 taking an income from their pension, between 4 July and 18 July 2022.

These articles are for information purposes only and are not a personal recommendation or advice.