Key considerations when saving for retirement and why early planning is essential: Paul Redfearn
If you’re approaching 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.
But having a rough idea of how much retirement income you’ll need and how you plan to fund this, is a good starting point.
Research by the Pensions and Lifetime Savings Association suggests that to fund a ‘comfortable’ retirement, the average single person would need £43,100 a year and the average couple would need £59,000 a year (after tax).
According to our own research, a 66-year-old retiring with a £1m pension pot who opts for income drawdown could draw a gross income of up to £63,000 a year until age 86. This assumes annual investment growth of five per cent after fees and that the income increases annually with two per cent 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 £31,500 a year and £25,000 a year, respectively.
Annuity or drawdown?
Annuity income is guaranteed for life, so you would receive the same annual income regardless of how long you live.
With income drawdown, the value of your pension could go down as well as up, and there’s a chance you’ll run out of money if you live longer than you plan for. Bear in mind that income drawdown enables you to vary your income to suit your lifestyle, whereas annuity income is fixed.
However, it is 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.
Other sources of retirement income
When assessing where your retirement income will come from, remember that your pension doesn’t have to be the only source. If your pension 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 tax-free and 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.
However, it’s worth bearing in mind that under the current rules, ISAs form part of your estate when calculating your inheritance tax (IHT) bill, whereas pensions fall outside your estate, so can be passed onto loved ones free of IHT. But in accordance with draft legislation, this is set to change from April 2027 when unused pension and death benefits will be considered part of a person’s estate for IHT purposes.
Other income sources to consider include cash savings accounts, shares, bonds and property income, as well as the state pension, which is £230.25 per week for those who qualify for the full rate.
Early planning is essential
Determining how much money you need to save for retirement is not easy. A financial adviser can 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 individual circumstances.
Paul Redfearn is wealth manager and head of RBC Brewin Dolphin’s Leeds office