Making your pension last

Merryn Somerset Webb / 22 June 2016

Now that you no longer have to buy an annuity, the onus is on you to calculate how to spend your money wisely, to avoid running out.



Being a new pensioner today just isn’t like being one 20 years ago. That change has much to do with iPads, internet shopping and self-parking cars. But it also has a huge amount to do with changes in pension regulations.

Last year all new retirees were given the right to keep control of their money on retirement. No more capped drawdown (which limited the amount people could spend from their pension every year). And no more compulsory annuities. Just total financial freedom. 

The problem: with freedom comes responsibility.

If no one else is telling us how and when we can spend the money we have saved, we have to figure it out for ourselves. We have to know how much money we can remove from our pension pots and still be sure that we won’t be on the breadline when we die.

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Making your pension last

You will be pleased to know that the pensions industry has long had a simple answer to what could be a complicated question. According to them it is 4%. If you have £100,000 and you want it to last 30 years you take out 4% of the initial capital in the first year (£4,000), then the same amount adjusted for inflation every year. Job done. 

You won’t be pleased to know they’re probably wrong.

That 4% comes with some problems. It is calculated using performance figures for the US, not the UK – that matters because the numbers work only if your capital is invested and grows at a certain rate. It doesn’t include the costs of investment. And it assumes that markets will grow at the same rate over the next 30-40 years as they have over the past 100.

So what happens if you take the 4% number and adjust for all these things – for the fact that historical returns in the UK have been lower than in the US; that costs can come in at 1.5-2% in the UK; and that markets are quite over-valued at the moment and therefore more likely to fall?

Read our guide to pensions and planning for retirement.

How much do you need to save?

According to investment research company Morningstar, it falls to more like 2.5% to 3%, which makes a huge difference to either the income you can take on retirement or the amount you have to save beforehand.

Let’s say that you want an income of £10,000 a year inflation-adjusted to top up your state pension. If you assume you can withdraw 4% you have to save £250,000. If you assume even 3.2% you have to save well over £300,000. Make it 2% and you’re up to £500,000.

This is unpleasant stuff. But it is better faced up to earlier than later. 

Confused by the new state pension? Read Paul Lewis' guide.

Making your money go further

It can also be mitigated to a degree. Morningstar assumes fees of 1%. You should be able to get that down to 0.6% (I’ll be writing about that soon!). 

Morningstar also assumes you have 50% equities and 50% bonds. If you can cope with more risk, you can up the equities and hope for better returns.

Finally, you can spend less in early retirement (and maybe work part-time) to leave more for later. But whatever you do, the key is to understand that things ain’t what they used to be. 

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.