How pension freedoms could leave you penniless in retirement

Harvey Jones 11 May 2018

Savers are now free to use their pension pots as a cash machine, taking money when they need it, but that freedom could come with a high price tag.Many pensioners risk getting their sums wrong and taking more money than they can afford, so that their pot runs down long before they do

Cashing in

Pension freedom reforms, launched in April 2015, allow the over 55s to cash lump sums from their personal or company pension plans (although not final salary schemes). This liberates you from the obligation to buy an annuity, which pays a regular income that is guaranteed to last for the rest of your life.

Many resented having to buy an annuity, especially after interest rates crashed in the wake of the financial crisis, but they did at least provide security.

Under pension freedoms, that cast-iron income promise has gone.


Income flexibility

Some now simply cash in their pensions at retirement, especially those with smaller pots. Growing numbers opt for the flexibility of income drawdown, where you leave your money invested in the stock market, and take cash as you need.

This means your money will still benefit from rising stock markets, allowing your pot to continue growing.

However, there are three dangers:


1. You draw too much money

Calculating how much you can afford to draw from your pension each year is not easy. The danger is that people take too much in the early years, as they try to enjoy their free time while still relatively young and fit, and do not leave enough for later.

Spend it all and you will find yourself scraping by on the state pension alone, which is no fun for anyone.


2. Stock markets crash

Leaving your pension money invested sounds great when markets are booming, not so clever when they crash. That’s fine if you can simply leave your money there, and wait for markets to recover.

The problem comes if you need to withdraw income when markets are down, as you are depleting an already shrunken pot.


3. You live longer than expected

Many people underestimate how many years they still have on the clock when they retire, and therefore how far their money has to stretch.

Your pension may have to keep running for 20 or 25 years, far longer than you think, and it could simply run out.


Mix and match

Pension freedoms have been widely welcomed for liberating savers from the obligation to lock their money into a poor value annuity.

However, you might still consider buying an annuity with, say, half your pension pot, to give you a stable, guaranteed income whatever happens. Then you can cry freedom with the remainder.

It is a complicated decision so consider taking independent financial advice or contact the free government guidance service Pension Wise.

Reader’s Digest has partnered with trusted pension and investment experts Flying Colours to provide you with the information you need to identify which option is best for you and help you plan successfully for retirement, or make the best choices once you get there.

Do you have a pension question? Email Guy Myles - founder of Flying Colours at

You can also call our pension experts on 0333 241 9919. We’ll only ever recommend the best pension investment approach to suit your circumstances at the best possible cost and we offer a no-cost, no-obligation exploratory meeting at a venue convenient to you, including your own home.