Making sure your money outlives you

Traditionally, it was a rule of thumb that 4% was a sustainable withdrawal rate from your pensions to provide for a 30-year retirement. But research from Morningstar suggests the figure should be much lower, and the 4% assumption was never ‘safe’ in the UK. Over a 30 year period, in a portfolio of 40% equities, they actually calculated the most likely successful withdrawal rate to be as low as 1.8%. Of course, it’s not quite that simple; there are many personal factors to consider, which we’ll discuss shortly.

The problem is, figures from AJ Bell show that 41% of retirees are withdrawing more than 10% of their pension every year. These people are likely to run out of money in just eight years. It’s not surprising then, that 68% are worried about running out of income!

What changed?

In 2015 HMRC introduced some quite significant changes to pension legislation called pension freedoms. It now means that anyone aged 55 and over can withdraw their entire pension as a lump sum, usually 25% tax-free and Income Tax paid on the remainder.

An annuity, which guarantees an income for life, is no longer the default choice to manage your retirement income. You can spend your pension as you please. In fact, HMRC report that since pension freedoms came in to affect almost 1.4 million people have withdrawn £21.7 billion from their pensions.

The problem is that by managing your own retirement provision, you take on the risk that an annuity provider once did. How long you live is a big factor, but there is much more to consider. A provider would have a whole department of professionals dedicated to managing that risk, ensuring they could maintain the income they guarantee. That onus is now on you and your trusted financial planner.

So, here are five steps to helping ensure your retirement income can outlive you.

1. Understand your likely lifespan

Research from the Institute of Fiscal Studies found that people in their 50s and 60s underestimate their chances of survival to age 75 by around 20%. Not so long ago, retirement lasted less than a couple of decades. But life expectancy has been increasing over time and it’s not unusual to spend 30 or 40 years enjoying life after work. That’s great news, it presents many more opportunities to enjoy yourself, but it also means you must take a more active role with your finances to make sure they don’t dry up.

Other income sources could be considered if you do underestimate your lifespan; returning to work, making use of other assets or downsizing your home, for example. But, the best solution is to avoid the situation altogether by planning appropriately.

You will also need to consider your health needs in later life. The demand for care is increasing as people continue to live longer. It could mean you may need to fund care costs. Alternatively, you may find that poor health means you want to spend more while you’re still active.

2. Setting realistic aspirations

Once you’ve determined the likely length of time you’ll need an income you can begin to budget. By setting realistic expectations and aspirations you’re much more likely to manage your money until the end of your retirement.

3. Embrace cashflow planning

Cash flow planning graphically illustrates the effect of your income and expenditure on your wealth over time. It’s a powerful way to understand your pension plan; think of it as budgeting but on a much grander scale. Intended to consider your objectives and the likelihood of achieving them, it also provides the ability to plan for various scenarios, such as:

  • the impact of large purchases;
  • the loss of an income source;
  • unexpected costs, such as long-term care;
  • gifting to family and friends;
  • downsizing property; and
  • inheriting wealth.

4. Remain invested

The inflation rate is currently 2.2%. That means your pension pot needs to achieve at least that in annual growth to retain its purchasing power. By investing too cautiously or keeping a large amount of cash, over time your pension value will effectively be decreasing without even making withdrawals.

AJ Bell research found that on average people approaching or in retirement are expecting an annual investment return of 4.83%. This is ultimately achievable with a diversified, well-managed portfolio, but we are expecting some volatility soon, especially around Brexit. Remember, when investing over the long-term history shows that markets do bounce back and to achieve investment growth, you will need to take on a level of investment risk.

5. Review your plan

As with your financial plan whilst working, during retirement you should still review your plan at least annually. Your aspirations will change over time, as might your attitude to investment risk. Making sure your financial plan remains on track is essential for it to provide income throughout retirement.

Ultimately, your safe withdrawal rate remains entirely personal to your circumstances, and is likely to change over time. As you can see, there are a lot of factors to consider. You can also be too cautious with your pension spending, potentially leaving an inheritance tax bill after you’ve missed out enjoying your wealth. If you’d like to discuss your pension planning and the rate you are able to spend, don’t hesitate to call.


The value of an investment can go down as well as up. Past performance is not a guide to future performance.

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.

The Financial Conduct Authority does not regulate taxation and advice.

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