Risks in retirement

The new pension changes may allow you complete access to your defined contribution pension pot once you have reached the minimum retirement age of 55, being increased to 57 years of age from 2028.

However, if you are planning to use them to provide an income in retirement; then you need to be aware of a number of factors that will affect the value of your pension savings and how you might use them.

Everyone will have a different retirement plan and make different choices about the way they use their pensions, savings and investments to generate an income in retirement.

It is important to be clear about your choices, identify the risks involved and also understand the tax you may have to pay.

The following information details risks to consider when planning for your retirement.

Longevity risk is the risk of living longer than expected and running out of money to support you in retirement.

Did you know that a male retiring now at age 65 can expect to live on average to age 83 and a female to age 85? That means their money has to provide them with an income for about 20 years!

However, these figures are average life expectancies and some individuals will live longer which means their money has to last longer too.

The table below shows the likelihood of someone aged 65, or at least one member of a couple both aged 65, surviving to a particular age in the UK.

Source: ONS – UK National Life Tables 2011 – 13.

risk in retirement

Mortality risk is the risk that you will pass away shortly after you retire and won’t enjoy the value from your pension that you have worked to provide. This risk can also extend to your dependents, should you pass away earlier than expected.

For example, if you were to buy an annuity with a £25,000 pension fund (not taking into account any spouse’s benefits, you could receive around £1,200 per year. If you were to pass away within a year of your retirement, you would receive just £1,200 in return for you spending £25,000.

There is about a 1 in 14 chance that a male aged 65 will not survive to age 70. Females generally live longer than males so, if they are married and a retirement income is not planned for both of them, the survivor could have to rely on state benefits alone.

Inflation reduces the buying power of your money but what is the impact over time?

Using 2% and 3% as example inflation rates, the following table details what £100 will be worth in today’s terms after a number of time periods.

Inflation risk

The following table shows what £100 would have been worth in October 2014, over a number of time periods, using actual historic inflation rates.


For example, if you were to spend £100 on groceries today, then a 3% inflation rate could mean that within 10 years, you would have to spend £134 in order to buy exactly the same items.

It is important that you protect yourself against inflation. With increased life expectancy you might need to support your retirement for longer, and if you don’t protect yourself against inflation then you could have to live in retirement on an income that will buy you less and less over time.

Your circumstances can change over time and it is unlikely that you are in the same position today that you were in 20 years ago; and it is unlikely that your circumstances in 20 years’ time will be the same as they are when you retire.

It makes sense to plan your retirement with the same degree of flexibility that you planned your finances during your working life. The chart below shows when people typically need their money in retirement. They tend to spend more at the beginning and at the end of their retirement. This is called a ‘U’ shaped income and it is important that your retirement income plan is flexible enough to adapt to changing circumstances throughout your retirement.

  • Active stage – typically enjoying more leisure time, spending money on the home or even continuing to help children financially
  • Passive stage – people may have done many of the things they ‘planned to do’ when they retired and as a result their expenditure reduces
  • Assisted and Supportedstages – are mainly about failing health and incurring social care and health costs, perhaps in later life moving into residential care.

changing circumstances

It is advisable to plan your finances to be able to adapt to changing income needs in retirement, as well as the other risks, for example inflation risk.

Investment risk refers to the extent that an investment fluctuates in value. An investment that experiences large increases and decreases in value is generally considered to carry a high level of investment risk.

It is important to understand that accepting some investment risk may be necessary to offset other types of risk, for example inflation risk, or to achieve your investment objectives (which differ for different people) .

Typically you experience increasing levels of investment risk when investing in Cash, Bonds, Property and Equities respectively, but conversely you should expect greater returns over time as well.

In general, the greater level of investment risk you accept, the greater the return you should expect to receive over the longer term. It is important to remember however that investments can fall as well as rise and you might not get back what you originally invested.

All income taken from your pension savings will be taxed according to your particular rate of income tax (marginal rate). For example, if you take enough income from your pension savings to put you into the higher rate tax band, then you only pay 40% tax on the income that is in excess of this tax band.

You should also be aware of pension scammers by checking whether they are registered with the Financial Conduct Authority. If they aren’t listed then there will be no place to go if the investment turns out to be a scam.