Pension pots: How much is enough?
As you approach retirement, one of the biggest questions you’re likely to have is, “Have I saved enough?”
There’s no golden rule for how much money you’ll need in retirement, as much will depend on when you retire, what you plan to do in retirement, and how long you live.
However, having a rough idea of how much income the average retiree needs, and how to generate it, is a good place to start.
What do I need for a ‘comfortable’ retirement?
Research by the Pensions and Lifetime Savings Association suggests that to fund a ‘comfortable’ retirement, the average single person would need £33,000 a year and the average couple would need £47,500 a year1.
According to our own research, a 66-year-old retiring with a £1m pension who opts for income drawdown could draw an income of just over £62,000 a year until age 87. This assumes annual investment growth of 5% after fees and that the income increases annually with inflation. The same 66-year-old could draw around £50,000 a year until age 95.
If their pension pot was worth £500,000, the corresponding figures would be £31,000 a year and £25,000 a year, respectively.
How much income would an annuity provide?
In contrast, an individual who buys an annuity at age 66 could expect retirement income of around £39,000 a year from a £1m pension fund or just under £20,000 a year from a £500,000 pension fund2.
These figures are lower than the corresponding income drawdown figures, but it’s important to note that annuity income is guaranteed for life. With income drawdown, the value of your pension pot could go down as well as up, and there’s a risk you’ll run out of money if you live longer than you plan for.
It’s also possible to take a ‘mix-and-match’ approach, for example buying an annuity to generate income for essential expenditure and using income drawdown for discretionary spending.
Think beyond your pension
It’s worth bearing in mind that income in retirement can come from other sources, not just your pension. So, if your pension pot is not as big as it needs to be, you might be able to supplement your income with other savings and investments.
ISAs, for example, can be a valuable source of retirement income. Although ISAs do not benefit from tax relief on contributions, withdrawals are completely free from tax. And, unlike pensions, there is no limit to the amount you can accumulate in ISAs in your lifetime.
This means ISAs can provide a substantial tax-efficient income that can allow you to leave your pension fund untouched in your first years of retirement, potentially giving it longer to grow. Depleting ISAs before pensions could also lower your estate’s inheritance tax (IHT) bill. ISAs form part of your estate when calculating IHT, whereas pensions usually fall outside your estate and so can be passed on to loved ones free of IHT.
Other income sources to consider include cash savings accounts, shares, bonds and property income, as well as the state pension, which is just over £9,350 a year for those who qualify for the full rate.
Determining how much income you’re likely to need in retirement is no easy feat, which is why it’s important to seek financial advice.
A financial planner will help you decide whether your pot is big enough, explain how to make up a shortfall, and advise on the most suitable way of accessing your pension, based on your needs and goals.
To find out how Brewin Dolphin can help toward your financial goals in retirement, start a conversation today.
1. https://www.retirementlivingstandards.org.uk/– Retirement Living Standards
2. *Annuity assumptions: single life, monthly in advance, no guarantee period, non-smoker, standard (healthy) rates, 2% indexation, payable for life. Quotes obtained from Iress on 23/04/21.
The value of investments, and any income from them, can fall and you may get back less than you invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Opinions expressed in this publication are not necessarily the views held throughout Brewin Dolphin Ltd.