Many newly retired people have difficulty adjusting to living on a lower income, leading them to overspend and then borrow money to keep themselves financially afloat, a new survey reveals.

A quarter of pensioners spend too much during their first year of retirement, with half then being forced to turn to credit cards, 21 per cent selling their possessions and 17 per cent taking out personal loans to make ends meet, according to Prudential.

Of the 26 per cent of pensioners who overspent, half splashed out between £1,000 and £5,000 more in their first year than later on in their retirement. But 15 per cent claimed to have spent an extra £10,000 more than in later years.

Almost half of those surveyed said they found it hard to live off their pension and savings in the first year with a further 14 per cent claiming it was "very hard".

Trevor Mitchell, Prudential UK head of retirement income, said: "For the average person, when they hit retirement, their income drops overnight. So it’s not surprising that many find it difficult to adjust their lifestyle, especially in the first year.

"The ‘pensioner splurge’ is a very real phenomenon. If a pensioner spends too much in the first year and does not have enough aside for the rest of their retirement, they could be left short later on."
But Prudential says that those who are retired can release money from their pension to give them a monthly income, making it harder to overspend.

Pensioners can either use the full amount of their pension to buy an annuity or they can take a lump sum up front and use the rest to fund an annuity.

Of the two options, two thirds of pensioners opted for the latter with 61 per cent taking more than £10,000 up front, 40 per cent taking more than £20,000, and over one-in-six taking more than £40,000 as a lump sum in the first year.

But pensioners are also advised to choose their annuity carefully.

Mr Mitchell continued: "With-profits annuities are particularly attractive as they can provide a regular income today, with the opportunity of increasing income in the future. By contrast a fixed annuity will not rise, so a person may find that the value of their annuity is nibbled away by inflation.

"With-profits annuities may rise because they are based on the performance of the with-profits fund. They are suitable for a wide range of people with ‘low to medium’ attitudes to risk."

"However, people should note that future bonus rates are not guaranteed and income from a with-profits annuity can go down as well as up."