Retirees could be depleting pension pots a decade too soon due to lottery effect…

• Based on current spending rates, many retirees could be set to empty their pension pot by their late 70s – leaving nine years of unfunded retirement on average

• Experts suggest the ‘Lottery Effect’ – where overnight access to large sums of money can lead to impulsive financial decisions

• 9% have regrets about how much of their pension they have already spent (Q2A)

• 55% sought no formal guidance in the process (Q5B)

Retirees could be at risk of emptying their pension pots a decade early, as they take large cash lump sums and withdraw too much in monthly income, according to new research from Legal & General (L&G)¹. With the average life expectancy of a current 60-year-old in the UK sitting at 86, some retirees could be left with a nine-year shortfall between their retirement funds running out², and the end of their life.

This could be a result of ‘The Lottery Effect’, according to experts. Overnight access to large sums of money can trigger a psychological rush which can spark impulsive or unsustainable spending – similar to winning the lottery. 

For some retiree’s, the Lottery Effect can change how they plan their future finances, with one in seven (15%) revealing they felt like the cash lump sum from their pension was an unexpected financial bonus, rather than part of their long-term savings plan. A further one in 10 (10%) said it felt like a payday, and they wanted to spend it.

Over a fifth (22%) said they took out a cash lump sum or would consider doing so because they wanted to put it into a current account or cash ISA to keep for a rainy day, and almost half (46%) said they accessed the cash simply because they could, just to have it to hand. But this could leave some people exposed to unexpected tax bills or losing entitlement to means-tested benefits, such as universal and pensions credit, in addition to missing out on the potential rewards of keeping their pension invested.

In addition, another driver for retirees accessing their pension could be the 2024 Autumn Budget announcement that from 6 April 2027, unused pension savings may be subject to inheritance tax (IHT).

Retirees drawing down at unsustainable rates

L&G’s research found that on average, people have £87,500 in their retirement pot before they start accessing it. A third (32%) of people will take a cash lump sum once they are eligible to do so, on average at age 60. Those that access cash from their pension typically take out 25% of their pot – the maximum allowance that people can access tax-free – and typically take an average income of £875 per month once they reach state pension age.

People generally expect their pension pot to last 22 years from age 60. But L&G’s analysis shows that for those who may not have other sources of income, such as property wealth, or a defined benefit pension, it typically runs out by age 77, falling short of the average life expectancy of 86.

Tax-free cash regrets

One in seven (14%) who have accessed cash from their pension revealed they have regrets about doing so or spent more than they planned. Among these respondents, 29% had unexpected costs to cover, while 26% felt they could afford it at the time.

A further one in seven (15%) said that since taking a lump sum, they have become more concerned about outliving their remaining pension savings.

The majority (58%) of those surveyed accessed their pension without seeking any formal advice or guidance from their pension provider, an adviser or from support services like MoneyHelper. Among those with spending regrets, more than one in 10 (11%) admitted they didn’t fully understand the impact of their decisions.

Katharine Photiou, Managing Director Workplace Savings at L&G comments: “For most people, their pension pot is the largest sum of money they’ll have access to, and after decades of hard work and saving, it’s natural to view it as a well-deserved reward. As we know, many people do sit on their savings and will have enough to last through the years they are retired. However, our research shows the sudden financial freedom can trigger ‘The Lottery Effect’ for some savers, which can lead to unsustainable spending. On top of this, with unused pension savings also subject to IHT from 2027, it could add to people withdrawing from their pots in an unsustainable way.

“But what seems like financial freedom now might turn into uncertainty later. Everyone’s situation is different, and some people may turn to other potential sources of income, such as their property, to make up the shortfall. Regardless of how you’re thinking about funding your retirement, seeking guidance can ensure you fully understand your options, helping you to make the best choice for you.

“There is free support and guidance available for everyone wanting to make more informed decisions, and it is worth speaking to your provider to understand what is on offer. For example, L&G has launched a Guided Retirement Planner for all our workplace members to help ensure that more people can afford the retirement they would like to have.”

Dr Emma Hepburn clinical psychologist added: “Our biases can influence what we do with our money, potentially resulting in inadequate planning for the future or making us more likely to spend too much in the here and now. As this research shows, if we view our money as a reward or bonus, we may be more likely to spend it, which can lead to what has been dubbed ‘The Lottery Effect’.

“Another factor feeding into decision making may be a cognitive bias known as hyperbolic discounting, which is our inclination to choose immediate gratification over rewards that come in the future, even when those things in the long term may be more beneficial for us. These choices are often between tangible things in the present which we are more likely to perceive the benefit of and therefore opt for, compared to future abstract things which require our imagination and feel less within reach.

“Perceptions of risk also often come into decision making, and we tend to favour decisions that feel more certain. As a result, we can feel that having or using money in the here and now is less risky than waiting to access it, even though this may actually create more risk for our future selves.”

L&G, the largest DC pensions provider in the UK, has launched a new Guided Retirement Planner to help deliver better outcomes in retirement for its 5.5 million DC workplace members.

Based on member insight, data analysis and behavioural science, it centres on simple, individualised support: crucial to help counteract low levels of understanding, engagement and financial confidence in pension savings.