People not only set out in retirement on the wrong foot, but also pass mid-retirement without properly reviewing their plans, according to a new report.
Research from the Pension Policy Institute found many retiring savers take full cash withdrawals or stay in investment strategies designed for pre-retirement, not post-retirement, needs.
With much of the financial services industry focused either on the point of retirement or late retirement estate planning, many pension experts believe it is time to address the neglected middle of the range. They argue for pensioners to undertake a mid-retirement “MOT” — or check-up.
The calls come more than 10 years after the introduction in April 2015 of new pension freedoms, allowing pensioners greater choice about how to finance their retirement income. That means that the first cohort of people who drew defined contribution pensions under the reforms have already reached mid-retirement. For those who set off on the wrong foot, it is crucial to stop and reassess their plans.
Pension provider Aviva says retirees who withdraw their pension at a rate of more than 7 per cent annually from age 75 are at significant risk of running out of money. A 10 per cent annual withdrawal rate, meanwhile, is likely to exhaust the pot within 13 years.
Charlotte Ransom, chief executive of Netwealth, a wealth manager, says a mid-retirement MOT is a “vital” opportunity for retirees to understand their financial position in what can be a “surprisingly long” second phase of retirement.
While 75 is around the middle of retirement in terms of life expectancy, it may not be the midpoint in spending terms. While it is after the “go-go years” of heavy spending on recreation in early retirement, the prospect of sizeable end-of-life care costs is still looming.
William Burrows, a financial adviser at Eadon & Co, says it is essential for retirees to consider their investment risk during a check-up.
“People’s attitudes and priorities change,” he says. “When people first retire, they underestimate their life expectancy. At mid-retirement, there’s a realisation that you might live into your 90s and need to de-risk.”
This might point retired people in the direction of purchasing an annuity, where 70 is the new 60 in terms of the most popular age to buy. A 75-year-old might qualify for an enhanced annuity offering a higher regular income based on his or her medical history or health status.
There is a case for being cautious, rather than aggressive, about withdrawal rates even for retirees who opt to stick with drawing down assets straight from their pension pots. This year’s market wobbles have illustrated the potential risks.
Burrows says it is “so easy” to get into a false sense of security.
“The markets have been racing away the last couple of years and then we got the shock of Trump tariffs,” he says. “But as you get older, your investments don’t have time to recover.”
Financial textbooks tend to argue that retirees should move into lower-risk assets as they grow older.
“The Holy Grail of retirement planning is to sell when markets are high and buy when annuity rates are good,” Burrows says.
There is a big gap between theory and reality, however. Data from Interactive Investor, the online investment service, shows self-directed investors stay heavily weighted to equities throughout retirement, without reducing investment risk over time. In fact, compared with those in earlier retirement, those 75 and older tend to have a much higher weighting of equities and investment trusts to cash and bonds. That is fine for those with other assets to fall back on, but not otherwise.
Ransom, meanwhile, warns that at mid-retirement it is important to consider fraud protection and ways to manage finances in the event of cognitive decline.
“It’s a key time to bring family into the conversation,” she says.
It is important for retirees to check their wills are up to date and reflect their current wishes. They should set up a Lasting Power of Attorney (LPA), allowing them to appoint one or more people to make decisions on their behalf in the event of future cognitive decline.
There is no need to invoke the LPA immediately. Many advisers suggest retirees should name a trusted third party as someone they are happy to involve in their financial affairs.
“It’s a powerful way to ensure transparency,” Ransom says.
Katherine Waller, co-founder of wealth manager Six Degrees, recommends keeping records of passwords and thinking about who should have access to vital documents.
Involving younger family members can alleviate the anxiety of dealing with technology and digital accounts. My mid-retirement parents, though still sharp as tacks, struggle with multiple passwords, apps and websites.
Fraud, however, is the most pressing concern. Pension scammers often target individuals over the age of 75 with cold calls and promise high returns or a cashback incentive.
Lucie Spencer, a financial planner from Evelyn Partners, recommends that families discuss such issues.
“Talking about money openly, with especially younger members of their family who they trust, can be a good start to protecting against this menace,” she says.
Kate Shaw, a chartered financial planner with Financial Life Planning, recommends setting up phones for elderly parents where all the numbers of people they know are programmed and the name is read out when the phone rings, so they know who it is and when not to pick up.
Of course, all this assumes that family members have a mid-retiree’s best interests at heart. If that is not the case, they may need to think about other trusted parties and financial advice may be even more essential.
Moira O’Neill is a freelance money and investment writer. Email: moira.o’neill@ft.com, X: @MoiraONeill, Instagram @MoiraOnMoney
