Making your pension last to age 100
The surest way to make your pension last a lifetime is to buy an inflation-protected annuity. This is an insurance product that pays a guaranteed income for life.
The improvements in rates we have seen in the past couple of years have made annuities more attractive for clients, either as a standalone solution or as part of a mix-and-match approach combined with drawdown.
If your clients are planning to go down this route, shopping around for the best rate – and making sure the provider knows of any health conditions that might impact on their life expectancy – continues to be essential.
However, even with rates improved, annuities are still inflexible and irreversible. Many people, particularly younger retirees, prefer to keep their money invested through drawdown, as it provides more flexibility and the potential to enjoy long-term investment growth throughout retirement.
The role of advice in drawdown remains critical, with engagement and regular reviews essential to ensure, among other things, they withdraw their money sustainably.
The extent to which a withdrawal strategy in drawdown is sustainable will depend on a number of things, including overall investment returns, the timing of those returns, inflation and, crucially, how long the person lives for.
If someone wants to retire today on an average UK salary of around £35,000, they might expect around £10,600 of that to come from their state pension (based on the flat-rate amount in 2023-24). This would mean their private pension needs to deliver an income of £24,400 per year.
If we ignore tax-free cash and assume 4 per cent annual investment growth, a 66-year-old could need a pension fund of around £625,000 to be able to withdraw £24,400 a year, inflation-linked at 2 per cent, and still see their pension last until age 100.
However, if they were to delay their retirement by five years to age 70, the size of the pension fund they would need to reach age 100 could reduce to around £575,000 – a saving of £50,000.
Savings levels required
The best way to ensure a comfortable retirement is to start saving early and often. To save £625,000, a 25-year-old would need to put away around £4,200 a year in total (inclusive of tax relief and any employer contributions), or £350 a month.
This assumes that contributions will increase by 2 per cent each year and investment returns after charges are 4 per cent per year.
Delaying by 10 years to start saving at age 35 sees the saving target almost double to £7,500 a year (or £625 per month), and if you wait until age 45 it rises to more than £14,500 a year (or around £1,200 per month).
Clients also need to think carefully about the investment risk they want to take. Younger investors, in particular, should be able to take more risk than their older counterparts, giving their fund the chance to grow over time.
