“Do pensions run out?”, is a question keeping many people awake at night worrying whether they’ll have enough money to last them throughout their retirement.
Yes, pensions can run out of money, although depending on which type of pension you have can mean your pension will last for the rest of your life. There are three main types of pension, defined contribution, defined benefit, and state pension and in this post, I’ll run through each one.
Knowing which type of pension you have, which can even be a mix of all three types, can help you plan ahead for retirement and know what risk you may have of running out of money, potentially having to drastically change your standard of living.
Three Main Types of Pension
Defined Contribution Pension
Often called a “money purchase” pension scheme and is when money is paid into an overall pot. This money can be paid in by you personally and by your employer and is invested into certain assets depending on your pension scheme provider.
What you’re left with when you come with retire is a finite pot that you need to make last throughout your retirement and can run out.
Defined Benefit Pension
Often referred to as a “final salary” pension, this type of pension guarantees a certain payout based on certain conditions such as the number of years working at a company and a calculation aligned to your final salary.
This type of pension has declined in popularity among employers as by its nature of being guaranteed, is costing employers a lot more money as the average age has steadily climbed over the past few decades.
Most of these types of pensions won’t run out as they’re guaranteed for life, however, make sure you check your specific policy as there may be certain conditions including tapering payments and impacts depending on when you start withdrawing.
Both defined contribution and defined benefit pensions are described as private pensions as they aren’t paid out by the government.
This type of pension is paid out from the government as is based on how many years you have contributed to National Insurance. You’ll usually need at least 10 years to qualify for any State Pension, then get the maximum at 35 qualifying years.
You can make additional contributions if you have missed any years. If you want to know more about the state pension, there’s a lot of information on the government website.
The State Pension is currently guaranteed for life, so won’t run out.
Do Private Pensions Run Out?
Yes, private pensions can run out if you have a defined contribution pension, however, it all depends on how quickly you spend it. With private, defined contribution pensions, there is a finite pot which you then have to plan how much time you need it to last.
The total pot size is based on how much you have contributed to it throughout your life plus any investment gains. When you first start drawing down your pension, you have the ability to take up to 25% of the total value as a tax-free lump sum. If you want to do this, just make sure you’re aware that when that money is gone, it’s not coming back.
Defined benefit pensions also fall into the category of private pensions. Most of the time these do not run out and you should expect to receive your benefits for life. However, make sure to check your specific policies so you can be sure.
Will UK State Pension Run Out? Is It Guaranteed?
No, the UK State Pension will not run out for those already claiming it as it is guaranteed for life. However, they are increasing the age from when you are able to start claiming it. It is currently 66 although is increasing to 68 for those born on or after April 1977.
There are many news headlines that aim to grab people’s attention highlighting that the State Pension could run out. Nobody knows for certain as it will all depend on what happens in the future and how the government will need to respond.
However, if they were to stop the UK State Pension, it would plunge millions of people into poverty and drastically reduce people’s ability to spend money causing quite a lot of harm to the economy. In my view, this will act as a deterrent for the government to ever stop the State Pension.
Will State Pension Exist in the Future?
What could happen, and keeps seeming more and more likely, is that the government will make the State Pension means-tested. This means for people with a certain sized private pension or assets above a certain size, won’t receive any State Pension.
This will save huge amounts of money for the government, and depending on what requirements they set, may not have too much impact on the economy. It will most likely be met with huge opposition from the public, so will probably take a long time to be put in place, however is definitely something you should be cautious of.
What this means for people who haven’t started claiming their State Pension yet is to not rely on this source of income when calculating how much you need for retirement. Relying on it could leave you being disappointed and possibly even having to delay your retirement.
Will My Pension Run Out?
If you do have a defined contribution pension that can run out, there are many pension drawdown calculators online that can help you understand how much money you should withdraw from your pension each year to make it last throughout your retirement.
This post I’ve written on how much you need to save for retirement may also be useful as it highlights an average retirement budget and what size pension is needed to support that level of spending.
The main factor that influences whether your pension will run out is your spending habits. The less money you spend each year, the longer your money will last.
How Long Should a Pension Last?
Retirement, and therefore a pension, should last around 20 years so make sure you properly prepare for this length of time. This is based on the average retirement age in the UK being around 64 and an average life expectancy of 81.
However, remember that these are averages. You may want to retire earlier and also be fortunate enough to live longer, so if you plan for a longer retirement, the more of a buffer you’ll have if either of these scenarios plays out.
Purchasing an Annuity – Guaranteed Income for Life
There is also a product available called an annuity where you can buy a secure income for life which can be useful if you are worried about running out of money during retirement. You can purchase an annuity with some of your pension savings or money you have outside of a pension.
As with anything in life, there are positives and negatives to purchasing an annuity. The main positive is that you can guarantee a certain level of income for life reducing the risk that you’ll run out of money. The main downside is that if you were to die earlier than the average life expectancy you won’t have fully benefitted from the product as may have less money to pass on to your family.
If this product does sound appealing, make sure to do your own research and contact a specialist or financial advisor if you have any questions.
Summary – Do Pensions Run Out?
As you can see, private defined contribution pensions can run out so making sure you plan for the full length of your retirement is crucial. The first step is working out what type of pensions you currently have, then understanding how long that money will last based on your spending habits.
However, make sure you factor in other types of income as not all your income may come from pensions. A lot of people also rely on savings, selling assets such as cars or art, or even collecting income from a property portfolio.
If you are worried about whether your pension will run out, make sure to contact a pension specialist or financial advisor so they can give you specific advice tailored to your personal situation.
Hi, I’m John. I’ve always had a keen interest in Finance, so much so that I’ve made a career out of it! This site is a place where I can share everything I’ve learned as well as give me the excuse to research certain topics.
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