Planning your future has arguably never been more important. When deciding when to retire, the most important thing to consider is making sure you have enough money to live comfortably.
Imagine you’re retiring today. Will you be able to financially support yourself, and potentially your family too, with your current pension savings?
The run-up to your retirement may feel overwhelming, but this is an important time for you and your savings.
So, as you plan for your retirement, you’ll need to look at different sources to estimate how much income you’ll have. These include the State Pension, personal or workplace pension schemes, state benefits you may qualify for on retirement and your savings or investments. Following the pensions reforms, there are now more options available than ever and this has removed the compulsion to purchase an annuity. It also means that you can use your pension fund to benefit your named beneficiaries, whoever they may be.
Basic retirement lifestyle If you are approaching retirement it’s time to think about what you’re going to do with the money you’ve been working hard to save all these years. The average UK pension pot after a lifetime of saving stands at £61,897[1]. With current annuity rates, this would buy you an income of only around £3,000 extra per year from age 67, which, added to the maximum State Pension, makes just over £12,000 a year – just enough for a basic retirement lifestyle.
In more recent years, when it’s time to take a retirement income, some people are choosing to do so through pension drawdown. Pension drawdown provides a way to establish a flexible income, set at whatever level you choose, which can be increased or decreased over time to match your needs.
Flexibility and control For many, this may seem a more fitting solution to their retirement needs than purchasing an annuity, which is a more established option that typically offers a set monthly income for life. However, although pension drawdown offers flexibility and control, there are differences to consider.
While annuity income is fixed for life, pension drawdown can only continue for as long as you have savings remaining – and once they’re gone, you’ll receive nothing. So, it’s important to receive professional financial advice to ensure that you withdraw your money at a rate that will last your expected lifetime.
Will your savings last a lifetime? It’s important to consider that your retirement could last for 30 years or more, depending on when you retire and how long you live. This is why some people use pension
drawdown as the option to provide their retirement income. Your savings remain invested even after you retire, which means they have the opportunity to continue growing through investment returns.
But it’s impossible to predict exactly how much they will grow each year. Some years they will grow more than others, and some years they may fall in value. If your rate of withdrawal exactly matched your growth rate, your savings could last indefinitely. But, because growth is so hard to predict, this is near impossible to do.
How much can you safely withdraw? A 4% withdrawal rate is typically stated as a guide for how much you can withdraw each year from your retirement savings. This figure is estimated based on the history of the financial markets and how much investments have tended to grow over periods of around 35 years (the expected duration of retirement for someone who retires in their sixties).
So, if you have £500,000 in savings when you retire, 4% would initially equate to £20,000 a year.
However, there are a few additional details that mean this figure can’t be used totally reliably:
• Past performance of the stock markets cannot reliably predict future growth
• The performance of investments in your portfolio may be better or worse than average
• It’s impossible to know for sure how long your retirement will last
• Your financial needs are likely to change over time, typically peaking in early retirement and then in later life
Changing pensions landscape. So, a 4% rate of withdrawal could be either overly cautious, resulting in the accumulation of wealth that could create an Inheritance Tax liability, or overly reckless, resulting in complete depletion of your savings when you still have years left to live.
In this world of ours, very little stands still. The same can be said for the pensions landscape. As high earners are faced with even more restrictions and potential pitfalls, it is vital to understand the rules and seek professional financial advice.
10 tips to enjoy the retirement you want
1. Review your spending habits and consider if you have the scope to save a little more each month.
2. Look up your annual benefit statements – you may have saved with more than one employer’s pension scheme.
3. Think about what financial milestones you’d need to reach in order to increase your pension contributions and review your investment choices.
4. Find out more about your current pension plan. If you pay in more, does your employer match your contributions?
5. Track down old pension schemes using the government’s finder service https://www.gov.uk/find-pension-contact-details. Or request contact details from the government’s Pension Tracing Service on 0800 731 0193 or by post.
6. Check that your Expression of Wish form is up to date. This is a request setting out whom you would like to receive any death benefits payable on your death.
7. Check your State Pension entitlement. To receive the full State Pension when you reach State Pension age you must have paid or been credited with 35 qualifying years of National Insurance contributions. Visit the Government Pension Service https://www.gov.uk/contact-pension-service for information about your State Pension.
8. Add up the savings and investments that you could use for your retirement. A pension is a very tax-efficient way to save for your retirement but you might also have other savings or investments that you could use to increase your income when you retire.
9. If you’re getting close to retirement and the amount you’re likely to retire on is less than you’d hoped, consider ways to boost your pension.
10. Decide when to start taking your pension. You need to set a target date when you want to start drawing an income from your pension – and remember, you don’t have to stop working to take your pension but you must be aged at least 55 (you might be able to do this earlier if you’re in very poor health).
Whether retirement is a far-off dream or a soon-to-be realised reality, the steps you take today can help you enjoy financial freedom throughout one of the best stages of your life. To find out how we can help you – please contact us:
Source data:
[1] https://www.fca.org.uk/data/retirement-income-market-data