Retirees who embraced pension freedoms a decade ago have seen their pots nearly double in the past 10 years, new figures show.
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.
It found that favourable market conditions over the past 10 years have helped retirees significantly outperform expectations, despite regular withdrawals and market volatility.
Introduced in April 2015, pension freedoms changed the way UK retirees could access their pension savings.
Prior to this, they were forced to use their pots to purchase annuities, locking them into a fixed income stream for life.
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.
This shift to flexible drawdown, while offering greater control over retirement savings, also exposed retirees to the risks of market volatility, particularly in the crucial early years of retirement.
The analysis from Fidelity focused on how the first cohort of retirees, those who retired in 2015, have fared under this new system.
Fidelity’s analysis tracked the journey of a hypothetical individual who retired on 6 April, 2015 with a £100,000 pension pot invested entirely in global equities.
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.
The rule states that withdrawing 4 per cent initially from a pension pot and increasing this each year by the rate of inflation means there is little likelihood of running out of money during a 30-year period.
Despite some significant market turbulence, including the 2020 pandemic-induced downturn, this retiree saw their pot grow to £189,000.
At the 4 per cent withdrawal rate, the hypothetical retiree took a total of £47,779 in income, but their portfolio was worth nearly twice as much as when they started, despite periods of market stress.
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.
For example, retirees withdrawing at the 7 per cent rate – a withdrawal level higher than most financial advisers recommend – still had £131,474 remaining after 10 years of retirement.
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.
But it wasn’t all smooth sailing. The data also highlight the anxiety many retirees felt early on.
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
The analysis shows just how favourable market conditions have been for this first cohort of retirees.
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.
“Even for those who withdrew 7 per cent, they still retained over £130,000, with 10 fewer years of retirement to fund.”
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.”
To safeguard against future downturns, Fidelity recommends that retirees keep a cash reserve of two to three years’ worth of income. This strategy allows individuals to avoid having to sell investments at a loss, in the event of a market dip.
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.”
Fidelity also explored how different asset allocations impacted retirees’ experiences.
While a 100 per cent equity-based strategy produced high returns, it was not without volatility.
Those who had diversified their portfolios by holding 60 per cent in global shares and 40 per cent in bonds experienced less dramatic fluctuations in value, though their overall returns were slightly lower.
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.
However, the smoother ride likely provided them with peace of mind, especially when markets were volatile, the research said.
Monk explained: “A diversified approach reduces the risk of sharp losses, especially during times of economic uncertainty.
“Even with a 7 per cent withdrawal rate, those with a 60/40 portfolio saw their funds grow over the decade, despite factors like high inflation.”
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.
For those closer to retirement, Fidelity urges caution. Monk suggested that retirees diversify their portfolios and keep cash reserves on hand to manage the financial risks that come with early retirement withdrawals.
He said: “While markets have been kind over the past decade, no one can predict how things will unfold in the future.
“The key to a successful retirement plan is balancing income generation with long-term growth and having a strategy in place to weather inevitable market dips.”
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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