Does a Pension run out ?

jerryr

Hi all,

Sorry I am clueless about pensions...

I thought that if you worked for a bank (for example) your pension once commenced is paid yearly for your lifetime - and that some people dying young (ie less paid out by the pension fund) and some people dying old (ie more paid out by the pension fund) would average itself out for the fund paying the pension. But then recently I read something which seemed to say that your pension might only last x number of years and so if you lived beyond a certain age your pension would run out / stop. Does that sound right?

Thanks...

PeacefulWaters

It depends on what you do when you access your pension pot.

If you use it to buy a lifetime annuity, it doesn't run out.

dunstonh

I thought that if you worked for a bank (for example) your pension once commenced is paid yearly for your lifetime

Depends on how the pension income is provided. A defined benefit scheme or an annuity will pay for life. Income drawdown will depend on how much you draw and how much the investments make. Draw more than it makes and the value erodes until ultimately, it runs out.

mark55man

Defined Benefit (Final Salary) - Never run out
Defined Contribution (Money purchase) Used to buy an Annuity - Never Run Out
Defined Contribution - Taken as drawdown Will run out if you spend too much or market performance is worse than predicted (which is the same thing as spending too much)

jerryr

Thanks to all for your helpful replies. Would it be right to say that most people in the UK would have a never runs out type of pension and the drawdown pension ie which has the possibility of running out is relatively uncommon?

Thanks...

dunstonh

Would it be right to say that most people in the UK would have a never runs out type of pension

Given that drawdown was a niche option before April but is now likely to be the main option, I would suspect that you cant compare the past to the future.

Drawdown pension ie which has the possibility of running out is relatively uncommon?

The cycle of pound cost ravaging tends to start after a market crash when the person doesnt reduce their income and/or is taking too much.

People have seen investments run out. It just requires sensible management, not taking too much and being flexible on what you take in negative periods.

An increasingly common method being utilised at the moment is an annuity and drawdown mix. state pension and annuity gives a guaranteed level and the drawdown does the rest.

mania112

jerryr wrote: »

Thanks to all for your helpful replies. Would it be right to say that most people in the UK would have a never runs out type of pension and the drawdown pension ie which has the possibility of running out is relatively uncommon?

Thanks...

Before the pension freedoms reforms this April it was estimated that 10% opted for Drawdown and 90% opted for Annuity (the 'it never runs out' option).

Recent studies in Australia who have for a long time had the same flexibility as we have just introduced show that it's the opposite: 90% drawdown and 10% annuity.

So we will see a huge increase in people opting for Drawdown, and we will also see a huge increase of people running their pots down to £0 very quickly

greenglide

So we will see a huge increase in people opting for Drawdown, and we will also see a huge increase of people running their pots down to £0 very quickly

Which is why there was logic in the system before the "freedom" arrived.

"Anyone" could have capped drawdown which limited them to the GAD rates.

If you had a certain level (£20k?) of guaranteed pension income (DB pension, Annuity) you could do flexible drawdown and access all of it.

Quite reasonable. Unfortunately lots of people have no DB pension and only a "trivial" amount of pensions savings so are unable to convert it to an income stream so they "want it now" to spend on .....

atush

jerryr wrote: »

Hi all,

Sorry I am clueless about pensions...

I thought that if you worked for a bank (for example) your pension once commenced is paid yearly for your lifetime - and that some people dying young (ie less paid out by the pension fund) and some people dying old (ie more paid out by the pension fund) would average itself out for the fund paying the pension. But then recently I read something which seemed to say that your pension might only last x number of years and so if you lived beyond a certain age your pension would run out / stop. Does that sound right?

Thanks...

The first pension in your example is a DB or final salary pension and never runs out.

The second is a DC or money purchase pension. With this type you can either buy an annuity (never runs out) or you can use drawdown (which can run out if you overdraw/spend.

jamesd

jerryr wrote: »

Thanks to all for your helpful replies. Would it be right to say that most people in the UK would have a never runs out type of pension and the drawdown pension ie which has the possibility of running out is relatively uncommon?

The vast majority of pensions being offered to new employees in the private sector are of the type where there is a pot of money that could in theory run out. It's quite easy to avoid that happening when taking income from investments using drawdown, there are some simple rules to follow that make it most unlikely, just doing things like not the income level with inflation if markets do badly. There's also the option of spending some of the money to support deferring the state pension or, usually much worse value for money, buying an annuity.

A combination of drawdown income and deferring the state pension is likely to do quite well. Deferring the state pension for those who reach state pension age from 6 April 2016 will add 5.8% to it for each year deferred, inflation-linked. It's an excellent way to ensure a good base income level.

princeofpounds

What tends to happen for 'sensible' people is that the money being drawn down varies with circumstances.


So if you accept a variable income, you will never actually run out of money.


An often-used rule of thumb is that in drawdown you can consume up to 4% of your pot every year. You generally hope that investment returns finance most of that, maybe even grow the pot in a good year. But perhaps you accept a modest amount of capital depletion on average because the pot definitely doesn't have to last forever.


Leaving aside the right and wrongs of that specific number, you will realise that whilst the pot can shrink in years when investment returns are poor, you will never hit zero. Because if your pot shrinks your 4% the following year is of a lower number.


Not everyone will follow such a strategy, but I just wanted to make the point that even in a pension scheme which theoretically can run out, it's actually possible to run it in a way that never does. But you trade off income variability for security.


To be frank, every pension system has to do some analogue of this trade-off. It's just that historically it happened behind the scenes, in government finances or pension scheme finances (both of which didn't get managed very well over the years). So the pensioners didn't feel they were bearing risks but businesses and taxpayers were.