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Why your pension pot could now run out 15 years early

by | Sep 6, 2022

Soaring inflation and falling markets are destroying dreams of early retirement.

Dreams of an early retirement have been crushed by rising inflation. Those retiring at 55 now stand to run out of money 15 years sooner than they previously would have. 

Soaring prices have dramatically cut the longevity of pension pots, with once-comfortable retirees now at risk of exhausting their savings more than a decade early. 

The earlier you retire, the bigger your nest egg needs to be. One year ago, you would have needed £447,195 set aside to retire with a moderate lifestyle at 55 without the risk of running out of money too soon, according to calculations by Brewin Dolphin, this pension would have lasted until age 92.

But that same sum of money would now be spent 15 years sooner, depleted by age 77, because rising inflation has increased the amount pensioners must draw from their pensions to maintain the same standard of living. This has been coupled with plunging stock markets, as many pensions have fallen by up to 10% so far this year. 

Carla Morris, of Brewin Dolphin, said even the most diligent savers would be caught out by the economic downturn. She said: “Regularly reviewing your pensions and investments, as well as the income that can be taken from them in retirement, is essential.”

A “moderate” standard of living in retirement cost £20,800 a year for a single person last year, according to the Pensions and Lifetime Savings Association, a trade body. This allows for a holiday in Europe for two weeks a year and eating out a few times a month.

But consumer prices rose 9.4% in the year to July, adding more than £2,000 to the amount pensioners need in their savings for each year of retirement. 

The state pension only starts to pay out at age 66, so those leaving the workforce at 55 must wait more than a decade to receive the monthly stipend. They would need to substitute the £9,630 a year with money from their own personal and workplace pensions during that time.

From state pension age onwards, they need almost £13,000 in personal pension money each year to achieve that moderate lifestyle. 

Those caught out by rising inflation and falling markets can soften the blow by delaying retirement, Ms Morris said. “If the retirement age was changed from 55 to 58, the pension pot would last until age 89, rather than 77. But if they don’t want to delay retirement, they could also increase the amount they pay into their pensions each year from the age of 51 from 20% to 40% of their salary. This would make the pot last until age 80.”

The cost of living crisis could force many early leavers back into work, as the value of their nest eggs are quickly eroded by inflation. 

According to Canada Life, the pensions group, if you stop contributing to a pension at 55 your pension will be 59% smaller on average than if you had kept saving until state pension age, which is currently 66. More than two fifths of over-55’s have retired before pension age since March 2020, research by the group has found.

This article is adapted from a piece in The Telegraph by Jessica Beard


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