Blowing retirement cash on luxuries when new easy access pension rules come into force next April may leave retirees short of money to pay the bills.
The warning comes from financial firm Partnership, which claims most people approaching retirement do not have the cash to cover their day-to-day spending without the lure of the new pension rules.
A study by the firm shows new retirees will need an annual income of £14,631 to pay for their essentials – which is already £1,626 above the typical pension income figure of £13,006 a year.
Rather than spending their pension windfall, more retirees need to cut back on their lifestyles if they do not want to struggle financially when they give up work, says the firm.
The figures come from asking 1,500 people aged between 40 and 70 years old how much they considered they needed to spend on essentials and luxuries.
Spending spree
The research found the average spending on running a home and paying day-to-day bills was £10,598 a year, while holidays and other discretionary spending was expected to come to £4,033 a year.
The figures show most people approaching retirement underestimate what they need to spend on essentials and find once they are retired they have to ration their income rather than go on a spending spree, says the firm.
Andrew Megson, managing director of retirement at Partnership, said: “If people want to enjoy their retirement with holidays, hobbies and days out, they will have to budget carefully according to our research.
“Not only will they have to pay more attention to their spending, but they need to save more and spending what they have will dwindle already stretched financial resources.”
Guessing retirement needs
From April 2015, retirement savers over 55 years old will be able to draw down their pension pots and spend the money how they wish.
However, studies by Partnership and other financial firms suggest that many people approaching retirement do not have a financial plan and may spend cash that they should be saving to make their retirement more financially comfortable.
“The problem is while working, people can expect their income to rise and cover any extra spending, but those approaching retirement have to make a best guess without knowing how long they will live and whether their savings will last long enough,” said Megson.
“Rather than spending when the opportunity arises after April next year, they should hold on and see how their finances pan out and decide whether they need to reinvest the cash for extra income rather than spend their hard-earned cash.”
