Terrible mistake empties pensions when you need them most

The ‘rule’ followed by millions that means their pension will run out

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Will your pension run out?

Will your pension last for the whole of your retirement? A new report out today reveals that there's a real risk that millions of people could end up emptying their pension pots well before the end of their retirement - because they've followed a devastatingly misleading 'rule'.

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The report, from Aegon, examined how people are withdrawing cash from their pension pots. They found that more than half a million people have taken over 15 million flexible payments from their pensions.

This in itself is great news, demonstrating there was a real need for this sort of pension flexibility and that people are confident in taking advantage of new opportunities. The concern is that only one in five people over the age of 50 have a financial adviser, which means that the vast majority of people withdrawing money from their pensions are doing so without any advice from an expert.

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The 'rule'

It's unlikely that people have complex actuarial calculations at their fingertips, so it's more than likely that many of them have opted for the popular 'rule of thumb' of drawdown. This was developed in the US in 1994 and states that if you leave your pension invested in the stockmarket, then you should be able to take 4% of your pension pot as income every year without running out of money.

The trouble is that this rule is now horribly out of date - which has serious consequences. Most importantly, interest rates have dropped through the floor since the 1990s, which means lower risk strategies return far less each year.

Aegon calculates that a 65-year-old entering drawdown in a low risk portfolio and taking 4% a year, has a one in five chance of running out of money. This assumes they will live to the age of 95, which seems outlandish, but given the increases in longevity, for a 65-year-old, this isn't an unrealistic expectation.

It says that the kind of income that can be sustained indefinitely in the current environment lies somewhere between 1.7% and 3.6% - depending on your life expectancy, attitude to risk, and investment strategy.

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What it means for you?

Anyone with a reasonable amount of retirement savings, should get advice when they approach retirement to avoid this kind of disaster. In future, they will be able to free up up to £500 from their pension pot in order to pay for it.

For now, they need to decide whether it's the kind of investment they're happy making. Nobody would argue that this kind of advice is cheap, but it is often worth it. You may also be able to bring down the cost of this advice by doing your research before you go - getting statements from every pension provider, and a state pension statement - so you know where you stand before you start.

If expert advice is too rich for your blood - especially if you don't have an enormous amount of pensions savings - it's worth getting free information. The government's Pensions Wise service is a great place to start, and has been set up specifically with this sort of thing in mind. You can talk to an expert over the phone, or book an appointment in person. They won't be able to offer advice, but will be able to highlight the pros and cons of each approach, and will hopefully help you avoid running out of money when you need it most.

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