28% of retirees could see their pension fund run out long before they die, according to the Pensions Policy Institute and Legal & General.
There are three factors which will contribute to the longevity of your pension when you start taking an income:
- Your life expectancy
How long your retirement lasts will dictate how many years you need your pension to support your lifestyle for. Of course, there’s no real way to know what age you will die, but you can make a good estimate, based on your lifestyle, habits and overall health.
Naturally, there is a chance you could have a much shorter or longer lifespan than predicted, and you will need to account for that when planning your retirement finances.
- The amount you start with
How much you have to work with when you leave work behind will directly influence the amount you can take each year without running out of money. This is where a financial planner can add value and show you how much you need to create a sustainable income.
- How you use your pension
With the average life expectancy creeping ever higher, it is not unusual for retirement to last 30, or even 40, years, so it is vital that your income during that time is sustainable, to avoid running out of money too soon.
Making your retirement fund last
There are many ways to make sure your retirement income will last as long as necessary, including having some left over to leave for loved ones when you pass away. These include:
Maximising what you have
This requires starting early, but the more money you can put into your pension while still working, the longer you should be able to make the funds last, as long as you don’t spend too much, too soon.
Not only should you be maximising the amount you are putting into your pension, but you need to make sure that you are using the right products for you. That means maximising your contributions to a Workplace Pension if you are eligible and benefiting from both tax relief and employer contributions.
Furthermore, the State Pensions will form a foundation income for you once you reach State Pension Age. That means you need to make sure you are eligible to receive as much as possible. To be eligible for the Full State Pension, you will need 30 qualifying years on your National Insurance record; 35 for the Full New State Pension. A qualifying year is one in which you have made National Insurance contributions through your employer, on a voluntary basis, or have been awarded National Insurance credits alongside certain state benefits.
You can check your National Insurance record, and make voluntary contributions to increase the number of qualifying years on it, here.
To see how much you could receive and when, use the State Pension Calculator here.
Considering a blended retirement income plan
The introduction of Pension Freedoms in 2015 means that there is now no upper limit on the amount you can withdraw from your pension fund once you are 55. However, the 25% tax-free lump sum still applies, meaning that any withdrawals made after you reach that 25% limit could incur tax.
How you withdraw income over and above the tax-free lump sum is up to you. You could choose to buy an Annuity. This provides a guaranteed annual income, which can be linked to inflation to increase the income needed in line with the rising cost of living. Alternatively, you may choose to put your retirement income into a Flexi-Access Drawdown arrangement, which allows you to withdraw money whenever you wish.
Flexi-Access Drawdown arrangements mean that you are given the freedom and flexibility to use your pension fund in a way which suits your needs and lifestyle. However, the lack of limits increases the risk of taking too much, too soon and leaving yourself with insufficient funds for later life.
It is possible to create a hybrid retirement income, where part of your fund is used to purchase an Annuity, while the remainder is entered into Flexi-Access Drawdown and is available for you to use to top up your base income or take lump sums when needed.
Reviewing your plan regularly
As you get older, your financial priorities may change. That means that regularly reviewing your financial plan will be the key to maintaining an income which supports your needs, whatever they might be.
You can review your financial plan alone, but it will be more effective if you engage your financial adviser at the same time. While there’s no harm in already knowing what changes you want to make when you walk in, we might be able to offer alternative suggestions which are better suited to your needs and change in circumstances.
Making further arrangements
It’s not the lightest of topics, but you will need to decide what happens to your finances when you are no longer able to make those decisions yourself. There are two parts to this:
- Arranging a Lasting Power of Attorney: This involves appointing someone who will make financial decisions on your behalf if you are mentally or physically impaired and cannot do so for yourself. This should be someone you trust to make decisions which are in your best interests.
- Write a will: There will come a time when your remaining finances will be distributed among your loved ones or passed on to your spouse. Having a valid will in place means that your wishes can be followed, whether that happens sooner or later. having a will can also help to reduce the amount of Inheritance Tax (IHT) your loved ones may have to pay on the legacy you leave behind.
Talk to a financial adviser
By taking stock of your circumstances and applying years of experience, qualifications and knowledge, we can give advice or offer suggestions which you may not have previously known about., finding the perfect strategy to meet your needs and help you to make the most of your retirement income.
For more information, or to get started, please feel free to get in touch with us on 02380 633636.