An article in this weekend’s FT asked the above attention gabbing question. To a certain extent it misses the point as the first questions should be, “How much income do I want in retirement?”. The answer to this is completely personal and dependent on the person’s unique circumstances.
Various retirement reports give a broad overview of what someone might need, assuming that they own their own home and have repaid their mortgage. The Joseph Rowntree Foundation states that an income of £18,800 is needed to play an active role in society in retirement. Research conducted by Loughborough University for the Pensions & Lifetime Savings Association (PLSA) suggests that a single person needs £33,000 per annum for a comfortable retirement with two foreign holidays a year.
The next assumption that is used is that people annuitize their income when they retire. While this is appropriate for some people, more experienced investors would rather “die in a ditch” than part with the capital in their hard-earned pension portfolio; particularly now that pensions are so tax-efficient from an Inheritance Tax perspective and can be passed on to younger generations. For the benefit of more cautious investors and experienced investors we will examine the capital required under both annuitization and pension drawdown to meet the PLSA definition of a comfortable retirement at age 67.
Income Capital required/equivalent#
State Pension £8,767 £296,382
Pension fund £24,233 £819,235
State Pension £8,767 £296,382
Pension fund £24,233 £605,825*
The above figures illustrate the value of the basic State Pension but also illustrate how much capital might be needed to generate income in retirement.
The value of good independent financial advice should not be underestimated when planning before and after retirement. For instance, it’s essential to have the right asset allocation when you are 10-40 years away from needing your retirement fund – if you are too cautious the fund will not grow enough. Additionally, if you have a contingency fund available when drawing income flexibly from your pension, you can draw a higher income turning to the contingency fund in years when markets fall, so as not to deplete the pension fund.
The above is a simplistic illustration of a multifaceted planning scenario that has not even attempted to consider taxation pre and post retirement, taxation on death, nor investment risk and the importance of diversification.
If you are concerned about how much income your will have in retirement, or whether your capital will last, please feel free to contact us for an initial no obligation discussion. We can help you put a plan in place for retirement; in the words of Benjamin Franklin, “If you fail to plan, you are planning to fail”.
*Assumes the 4% safe withdrawal rate increasing withdrawals with inflation, articulated by William Bengen, looking at market returns from 1928, assuming a 30 year withdrawal period.
# Assumes male non-smoker aged 67 single life annuity increasing with RPI (source Assureweb).
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