The mistake that means pensioners may run out of cash

New pensioners make cutbacks - but fall short of the most important step

Concerns that pensioners would get hold of their tax-free lump sums and blow them on extravagant purchases have proved - unsurprisingly - to be patronising poppycock. A study by Prudential has revealed that fewer than one in ten people overspend in the first year of retirement. In fact, they are more likely to underspend.

Traditionally, the first year of retirement sees people withdrawing any tax free cash they want to take from their pension. They then have a unique opportunity to splash the cash. Now that pensioners can withdraw anything they like - at any stage (subject to tax after the first 25%) - the first year sees few of them splurging.

While 22% take a holiday and 16% buy a car, 35% decide not to buy anything at all out of the ordinary. This is largely because 36% of them are concerned about how much money they have to live on throughout retirement - and are keen to make their money last.

The mistake

But while this concern for the future is admirable, pensioners are still making one key mistake, which could mean they either run out of money before the end of their retirement - or suffer a needlessly frugal retirement and die with a small fortune still squirreled away. The mistake in question is a failure to budget. Two thirds of pensioners admitted they hadn't set a budget for the first year of retirement.

Of course a budget isn't a complete answer. In order to be able to spread your income out equally over your entire retirement, you would need to know exactly how much your pension investments will grow - and precisely how long you are going to live. However, if you work to traditional averages, and leave a sensible buffer for those lucky few who clock up more than a century, you can draw up a reasonable budget.

At the very least, this will indicate whether you have a sensible sum to live off each year, while you are still young enough to do something about it. If you discover that you have a shortfall in your 60s, at least you have the chance to keep working for a few years - leaving your pension investments to grow and even putting more cash aside for the future. If you only discover this in your 80s or 90s, your options may be much more limited.

Unfortunately, some people will have made this process even harder for themselves. Of those who have taken cash from their pension, over two thirds did so without taking advice. And while this may be a straightforward decision for people with very small pensions - assuming they have more substantial pensions elsewhere - there are other instances when people will have eroded far too much of their savings - and possibly landed themselves with an unexpected tax bill into the bargain.

Vince Smith-Hughes, a retirement income expert at Prudential, said: "The pension freedoms have opened up a whole new set of possibilities for retirees, but for many people hoping to make the most of the new flexibility while also ensuring they don't outlive their savings, the help of a professional financial adviser can be very important."

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