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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

A new study looks at the financial habits of people in later life  

How much of your pension pot should you spend in retirement? If you’re intending to remain invested through drawdown in your later years, this question should be front-and-centre as you plan your retirement income strategy.

We’ve previously discussed the potentially deleterious impact a combination of large withdrawals and poor investment returns – so-called ‘pound cost ravaging’ – can have on your pension plans.

However, a paper published by think-tank the Institute for Fiscal Studies recently suggests underspending in retirement could be just as serious a problem.

According to the briefing note – which assessed how people spend non-pension wealth – most assets will be left untouched during retirement. The majority of this wealth is split between property (60%) and ‘financial’ (22%). Financial wealth includes things like money invested in ISAs, bank accounts and directly-held stocks and shares.

Real net financial wealth was, on average, drawn down by 17% between the ages of 70 and 80 and 31% between ages 70
and 90.


The study points out this is ‘significantly slower than the decline in remaining life expectancy between these ages’, meaning most people will not come close to spending all of their assets before they die.

The findings could have implications for the pension freedoms and those using the reforms. They also mirror concerns raised in Australia, a country with a system offering similar levels of flexibility in retirement.

Down Under it was ‘reckless conservatism’ that was shown to be the biggest problem among retirees, with people taking an overly cautious approach to spending in later life and so potentially not making the most out of their savings.

How much you should spend in drawdown has been the subject of a significant amount of research, with most believing a healthy 65 year old can spend 3-4% of the initial value of their fund every year and be confident it won’t be exhausted.

The extent to which this is true depends on the performance of your underlying funds, so it’s vital you monitor your investments and withdrawal strategy and review regularly (at least once
a year).

There are perfectly good reasons to not spend some of your assets. Drawdown pensions, for example, can be passed on to your loved ones tax-free if you die before age 75, or at your recipient’s marginal rate of income tax if you die after
age 75.

So if your priority is to leave something behind for others – perhaps in the knowledge you have enough secure income to fund your needs today – then leaving your retirement pot untouched can make
perfect sense.

Tom Selby, senior analyst, AJ Bell


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