Thousands of retirees risk running out of money in later life because they are withdrawing too much from their pension pots when they gain access to them, a new report has warned.
Many pensioners are depleting their savings up to a decade too early, leaving them financially vulnerable in retirement, according to Legal & General (L&G).
The trend has been dubbed “the lottery effect” – with retirees treating their pension pots like a windfall rather than carefully managing withdrawals for long-term security.
On average, people start accessing their pensions at 60, often withdrawing the maximum 25 per cent tax-free lump sum in one go.
By the time they reach state pension age – which is currently 66 for both men and women – they are typically taking £875 per month from what remains.
Yet with an average pension pot of just £87,500, many are on track to run out of money by the time they reach 77 – despite the average life expectancy of a current 60-year-old in the UK sitting at 86.
Katharine Photiou, managing director of workplace savings at L&G, said the findings highlight a growing problem in the UK, where many retirees don’t have additional assets such as property or defined benefit (DB) pensions to fall back on.
Instead, they risk entering their final years reliant solely on the state pension, currently worth £11,502.40 per year.
Photiou said: “For anyone approaching retirement, early and active planning is important.
“Make the time to take stock of what you have saved overall, including other sources of income, such as property wealth.
“Having the full picture will enable you to plan for the retirement you want and identify how your savings can help you get there.”
One of the biggest concerns is that many retirees are making financial decisions without professional advice.
More than half (58 per cent) of those surveyed admitted to dipping into their pensions without consulting a financial adviser or even using free guidance services such as MoneyHelper.
Of those who regretted their withdrawals, one in 10 said they hadn’t understood the long-term impact of their choices.
Experts have said “the lottery effect” can trigger a psychological rush which can spark impulsive or unsustainable spending – similar to winning the lottery.
For some retirees, it can change how they plan their future finances, with one in seven (15 per cent) revealing they felt like the cash lump sum from their pension was an unexpected financial bonus, rather than part of their long-term savings plan.
A further one in 10 (10 per cent) said it felt like a payday, and they wanted to spend it.
Some spent lump sums on home renovations, helping family, or holidays – only to later realise how quickly the money had disappeared.
But over a fifth (22 per cent) said they took out a cash lump sum or would consider doing so because they wanted to put it into a current account or cash ISA to keep for a rainy day.
The concern is, this could leave some people exposed to unexpected tax bills or losing entitlement to means-tested benefits, such as universal and pension credit, in addition to missing out on the potential rewards of keeping their pension invested.
Another driver for retirees accessing their pension could be Rachel Reeves’s Budget announcement that from April 2027, unused pension savings may be subject to inheritance tax (IHT), the report said.
There is a lot of free support and guidance available such as online calculators which can give a clearer picture of potential retirement income, while Pension Wise provides free, impartial guidance to over fifties.
If you are worried about whether you have enough to last you through your retirement years, here are some tips from Photiou on how to boost your pot:
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