Pensioners who withdrew 4 per cent annually from their £100,000 pension pots are seeing impressive growth, with their funds now worth £189,000, according to new analysis from Fidelity International.
Introduced in April 2015, pension freedoms changed the way UK retirees could access their pension savings.
But with the new reforms, pensioners were given the flexibility to drawdown income from their pensions in a manner tailored to their personal needs, with the freedom to keep the rest of their savings invested and their money growing.
The analysis from Fidelity focused on how the first cohort of retirees, those who retired in 2015, have fared under this new system.
Over the past decade, this retiree withdrew 4 per cent of their pot annually – under what is known as the 4 per cent rule – with withdrawals increasing to keep up with inflation.
Despite some significant market turbulence, including the 2020 pandemic-induced downturn, this retiree saw their pot grow to £189,000.
Even those who took higher withdrawals, such as 6 per cent or 7 per cent, maintained a healthy amount in their pension pots after a decade, the data shows.
This is in stark contrast to the £100,000 annuity that would have paid just £5,304 annually in 2015, with no possibility of growing the pot.
Those withdrawing 4 per cent annually saw their pot dip below £82,000 within just 10 months of retirement, creating a moment of fear that their retirement funds might not last the full 30 years.
Cash reserves recommended, experts say
Ed Monk, associate director at Fidelity International, said: “The class of 2015 has benefited from strong market returns, particularly in the years following the initial years of pension drawdowns.
He added: “Past performance is no guarantee of future results. While these retirees have had the benefit of a strong decade, the market landscape is different now, with higher inflation and interest rates posing new challenges.”
Monk continued: “While it’s crucial to ensure that your retirement income lasts, being overly cautious and keeping too much in cash could mean missing out on potentially higher returns.”
While a 100 per cent equity-based strategy produced high returns, it was not without volatility.
Retirees with a 60/40 portfolio withdrew the same amount as those with an all-equity portfolio, but their pots fell to a lower minimum value during market dips.
Monk explained: “A diversified approach reduces the risk of sharp losses, especially during times of economic uncertainty.
What does this mean for future retirees?
Those still decades away from retirement should consider the long-term potential of keeping a significant portion of their pension pot invested in equities, but also be prepared for market volatility.
He said: “While markets have been kind over the past decade, no one can predict how things will unfold in the future.
The Government’s Pension Wise service remains an invaluable resource for retirees to get free, impartial guidance, and Fidelity also offers free retirement guidance to help individuals navigate their options.
As more people embrace flexible drawdown, the experience of the class of 2015 is a powerful reminder that good planning, combined with favourable market conditions, can lead to a retirement that outperforms expectations.
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