She comments: “The removal of income limits, while very useful in supporting changing income needs, means individuals are no longer given any indication of sustainable income levels, even at the fairly broad level of the previous Government Actuary Department (GAD) rates.”
According to Ms Tait, very few people outside of the pensions industry would be able to assess accurately how much income they can withdraw, without draining their fund between retirement and death.
This is all the more pertinent given the latest mortality data from the Office for National Statistics, which shows life expectancy has improved drastically over the past 30 years.
Its latest statistics show a male born in 2014 to 2016 had a 21 per cent chance, and a female a 32 per cent chance, of surviving to at least age 90.
Although improvements in life expectancy for both sexes has now slowed by a few weeks, the percentage of people living to 90 and above has risen significantly since the 1980s.
Kim Lerche-Thomsen, founder and chief executive of Primetime Retirement, says: “Some retirees fail to appreciate the dangers of taking out too much income from their drawdown pot in the early years of retirement.
“This can leave them vulnerable to the possibility of not having enough pension in later life, particularly if fund values fall sharply during this period.”
Steven Cameron, pensions director at Aegon, agrees there is a significant risk that people will end up outliving their pension pot.
“Assessing how much income to take in a given year is a complicated decision, and most people will not have a clear view on what a sustainable income rate might be”, he comments.
“Add onto this considerations, such as people’s desire to spend more in early retirement when they are healthy and active, and you have a potentially very complicated decision on your hands.”
Longevity and sequencing risk
According to Andrew Tully, pensions technical director for Retirement Advantage, the most “significant issue” with drawdown is longevity risk.
He explains: “People do not know how long they will live, which means making decisions with one crucial piece of information unavailable.
“That can be compounded for those taking an income if the value of investments fall in the early days. This is often referred to as ‘pound cost ravaging’ and can have irreversible consequences.”
Mr Tully adds if investments have several bad years at the start, there is a big risk people can run out of money very quickly, instead of it lasting their whole retirement. This is known as sequencing risk.
In a guide for financial advisers, Royal London has explained how those people taking income out of their pension pot could find the effect of investment returns can have a far greater effect on their money than those still in the accumulation stage would face.
