In the back
It seems ridiculous, because a pension is probably the
biggest savings exercise anyone will carry out in their
lifetime, yet the level of ignorance around the subject is
breath-taking
less than living off your portfolio.
Your pension could well be the
largest amount of money you have
ever had and could grow significantly
in retirement. This will allow you to
live off the income generated by your
investments and gradually spend
your capital over time.
a pension before retirement, sell other
assets (such as property) to boost its
value, or take more risk with your
investments at retirement.
Aiming high
Achieving annual returns of 8 per cent
per annum in a higher risk portfolio
as opposed to 2 per cent per annum
in an income portfolio can make a
dramatic difference.
Going the distance
A £300,000 pot at retirement
There are two schools of thought on
invested in a portfolio growing at 2
how best to invest your pension in
per cent net of charges (and assuming
retirement.
inflation of 2.5 per cent) would power
First, you can invest in a low-risk,
an income of £1,750 a month and last
income-driven portfolio, which has
until you are 80.
the benefit of keeping your money
The same amount in a higher risk
away from stock-market fluctuations, portfolio, growing at 8 per cent per
but offers little in the way of upside.
annum, would last until the age of 89.
This is a good strategy if you have a
It is worth considering increased
large retirement fund, but if you have longevity provides you with a greater
less than £500,000, it is unlikely to
time horizon where you can take more
generate enough growth to last.
risk. You may also decide that, by the
Given life expectancy is increasing
time you reach your late 70s or early
and we do not have the benefit of a
80s, you don’t want to take additional
defined benefit pension, we typically
risk and buy an annuity. Your cash-
need to make less money last for longer. burn is likely to have decreased and
If that’s the case, the only real
you can use an annuity to “insure”
choices are whether to save more into against living for too long.
FE TRUSTNET
[ PLATFORMS & PENSIONS ]
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YOUR RETIREMENT BALANCE SHEET
ASSETS
Pension
Savings
Current property
LIABILITIES
£400,000 Mortgage
£75,000
£100,000
Other debts
£25,000
£500,000
Smaller house purchase £300,000
£1,000,000
£400,000
Your pot at retirement (age 67): £600,000
WHICH STRATEGY FUNDS MY CHOSEN LIFESTYLE?
With my £600,000 in retirement I could buy an annuity or enter drawdown (assuming
in both cases that none of the 25 per cent tax-free cash option is withdrawn).
Annuity income:
£26,507.56 per annum until death (£2,209 per month)
Source: Aviva annuity calculator, 28 August 2019
Drawdown:
Estimated drawdown income until age 90:
3% growth (inflation-linked at 2.5% pa): £27,000 (£2,250 per month)
5% growth (inflation-linked at 2.5% pa): £33,600 (£2,800 per month)
8% growth (inflation-linked at 2.5% pa): £44,400 (£3,700 per month)
Lower risk
Medium risk
Higher risk
Figures do not include the state pension
Size isn’t everything
In conclusion, ensuring you have
enough money in retirement isn’t just
about having a large pension pot. It
is about defining how you are going
to live in retirement, working out how
much that is going to cost each year
and then looking at how that can be
funded until you are at least 90.
If you can go on the holidays you’d
like, drive the cars you need, and run
the house you want for £3,000 per
month, then that’s what you’ll need in
your retirement plan.
The more you have saved and the
more you invest wisely going forward,
the more you will have to run your
lifestyle of choice.
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