Less than half of retirees (48%) aged 65 to 75 are confident they are on track to make their pension savings last for life.
And only a quarter (26%) of these “mid-retirees” say they feel financially secure.
This is according to a joint study by Aviva and the charity Age UK, which looks at how retirees are managing their pension savings and wider finances in later life.
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It also found a gender pension gap among mid-retirees, with 19% of women reporting they feel financially secure compared to 32% of men.
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The research highlights the difficulties pension savers have in managing their financial needs as they age, and the importance of doing a “mid-retirement MOT”, argue Aviva and Age UK.
Doug Brown, CEO of insurance, wealth and retirement at Aviva, comments: “Pensioners today clearly value financial security, but many seem to be sleepwalking into later retirement with a ‘set and forget’ approach to their retirement income.
“They are among the first retirees getting to grips with the complex decisions that come with pension freedoms and need more support to make choices that will work for the whole of their retirement years.”
Pension freedoms refer to the rule change in 2015 that means savers do not need to buy an annuity to access their pension pots, and can withdraw money as they please. While accessing your retirement savings whenever you like is more flexible and can be better value than buying an annuity, the risk is you could outlive your nest egg.
Earlier this week a separate study warned that pension savers face running out of money just 11 years into retirement.
The idea of doing an MOT on your finances is well-known. Two years ago, the government launched a midlife MOT, aimed at 45-to-65 year olds. This looks at work, health and money and helps people plan for the future.
But Aviva and Age UK say pension savers should also do an MOT when they’re mid-way through retirement, which could cover drawing an income from their pension, inheritance tax, fraud protection and state benefits.
Paul Farmer, Age UK’s CEO, says: “We frequently hear from struggling pensioners, many of whom have a small private pension, about how tough they have found the last few years. Managing your pension and other finances becomes harder as you get older – especially where people have suffered a major life change like a bereavement or a dementia diagnosis.
“The mid-70s is often a point where people need to take stock and think through their options.”
Who should do a mid-retirement MOT?
Aviva and Age UK are currently working together to consider the feasibility of a mid-retirement MOT pilot “to help us understand how the industry can better support people to manage their money for a secure, fulfilling later life”.
They say the initial target audience would likely be mid-retirees aged 65-75 who do not pay for financial advice. The MOT could be conducted by telephone, in-person and/or online.
In practice, if you wanted to do your own mid-retirement MOT, you could perhaps do it roughly a decade into retirement, or in your mid-70s.
The government already offers a midlife MOT, which includes a range of digital tools from MoneyHelper, the NHS and JobHelp. Aviva also offers a free midlife MOT app, while Legal & General has a free midlife MOT course.
The Aviva and Age UK research found that nearly two-thirds of mid-retirees (65%) think there is not enough support for people managing their financial needs as they age.
A similar proportion think a private pension should provide an income for life rather than functioning as a flexible savings account.
According to the Pensions Policy Institute, savers aged over 75 who are withdrawing from a £100,000 pension pot at a rate of more than 7% are at significant risk of depleting pension pots prematurely, with a 10% withdrawal rate expected to exhaust pension pots in 13 years.
For example, a 75-year-old couple with a pension pot worth £100,000, who withdraw from it at a rate of 10%, have a 75% chance that the money will run out while one of them is still alive.
Brown at Aviva notes: “Choosing to withdraw a private pension at a rate of more than 7% from the age of 75 requires strict financial discipline to make that money last. There is a real danger that without the right advice and guidance in place, pension pots will run out too soon.”
Financial advisers generally recommend doing an annual review of your finances, including your saving and spending habits and protecting your money from inflation and tax.
Scott Gallacher, director at the IFA firm Rowley Turton, tells MoneyWeek: "A mid-retirement MOT is a good idea, but I’m not sure it goes far enough. My clients have annual reviews focused on their lifestyles, not just their money.”
Ross Lacey, director of Fairview Financial Management, adds: "We believe it's essential to have a yearly retirement MOT in order to make the most of this phase of life. This way, everything remains on track as things change in the wider world, and the lives of clients.”
However, if you don’t have a financial adviser on hand to help you with this each year, it could be beneficial to do your own MOT half-way through retirement. You might have made some decisions when you stopped working, for example withdrawing 5% of your pension savings every year and choosing not to buy an annuity – but it could be sensible to change this as your retirement progresses.
The Aviva and Age UK pilot is expected to offer guidance and support around nine areas. These are: pension savings and financial health check, will and estate planning, state benefits and access to care, reducing the cost of household bills, making savings work harder, fraud and scams, budgeting and cash flow, tax planning, and long-term care options.
Joshua Gerstler, a wealth manager at The Orchard Practice, a financial planning firm, gives the following list of things to think about when performing a mid-retirement MOT:
- Your health. Has your life expectancy changed due to ill health, and/or do you need to think about care costs?
- Outgoings. Spending patterns in retirement evolve – early retirement might involve more travel and active pursuits, while later years may bring higher healthcare costs.
- Tax efficiency. Legislation and tax allowances change regularly, and keeping on top of these can make a significant difference to your financial wellbeing.
- Legacy and gifting. Your goals might shift over time – perhaps you want to pass on more to your family or support a grandchild through university.
- Market volatility. Your investment portfolio needs regular rebalancing and adjustment to reflect changing market conditions and your tolerance for market volatility.
- Inflation protection. Rising costs can erode your spending power if not managed correctly.
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