What do I have to live on in retirement?
An interesting article I stumbled across whilst reading The Daily Telegraph: http://www.telegraph.co.uk/finance/personalfinance/pensions/10148057/How-to-get-by-on-a-100000-pension-pot.html
This is a slightly odd article as Pension Policy Institute statistics suggest that of the retirees who have pension assets, most have less than £60,000, with the average pension fund used to buy an annuity, after tax free cash being £25,874 in 2010, (https://www.pensionspolicyinstitute.org.uk/default.asp?p=84, the most recent figures available).
So, what are the messages from the article?
Average expenditure for the retired is relatively low, at £9,900 per annum for a single person and £17,900 for a couple, so a full State Pension plus the income from a £100,000 annuity will cover it, but the elephant in the room is inflation, reducing the value of the “fixed income” over time.
An index linked annuity reduces the starting annuity too much for comfort, so the article is suggesting the use of drawdown schemes for long term retirement income.
Putting my IFA hat on, drawdown schemes based on a £100,000 pension fund are realistic, but:-
a) You have to be willing to entertain an element of investment risk
b) There is a cost for advice, both at the start and then regularly until you die or annuitise.
c) There are more risks than just simple investment risk – government can influence what you can receive by fiscal policy and by changes in pension law.
d) Smaller pension funds will give rise to disproportional running costs.
For someone with an ‘average’ pension fund, say £34,500, drawdown is not likely to be a realistic option, so making the best of a conventional annuity is imperative. As a minimum, explore, with a professional adviser, the Open Market Option and the possibility of an enhanced annuity.
If you are still a few years from retirement, make some enquiries about the current state of your pension, or pensions and try to calculate roughly how much you will have to live on. Do not try and calculate this accurately as it will be practically impossible and an estimate now will be more useful than the actual figure a month before you retire! Assume you will take the full 25% tax free cash, (Pension Commencement Lump Sum, PCLS), and a 5% yield at age 65. This will give you a “ball-park” figure based on a single life, level annuity with a 5 year guarantee.
Just to give a little worked example, imagine Joe, a 65 year old single man with a full state pension, no Additional State Pension, as he opted out in the ‘80s, with a pension fund of £59,600.
Pension annuity income, 75% x £59,600 x 5% = £2,235 per annum
Investment income on the tax free cash, 25% x £59,600 x 5% = £745 per annum
State pension, £110.15 per week x 52 = £5,727.80 per annum
So, Joe’s annual income will be £2,235 + £745 + £5,727.80 = £8,707.80 per annum
Now Joe knows he either needs to save more or expect less in retirement!
I think more people should certainly be alert of this type of situation. You have got to ask yourself; will you have a sufficient amount of money to live the lifestyle you would like by the time you retire?
If you are thinking yes; think again. Better still, check!
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If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.
If you know you need formal advice, have a look at http://bankfield.net/personal/retirement-planning/ or ask around for a recommendation, it might even be me.