Thousands of retirees are shunning Annuities when they reach retirement age. Instead, they’re taking advantage of the opportunity to access their pension savings flexibly. It can be a fantastic way to match your income and lifestyle, but figures suggest many are withdrawing unsustainable amounts.
There are many benefits to taking your pension flexibly. However, you need to keep in mind that you’ll be in control of when withdrawals are made and at what point it may run out. If it’s an option you go with, ensuring sustainability and building an income stream that will last a lifetime is crucial.
How much are people withdrawing from their pension?
The latest figures from HM Revenue & Customs (HMRC) indicate the average pension withdrawal in the UK is £7,254 each year. That may not sound like a lot, but when you consider the average pension entering drawdown is between £80,000 and £123,000, it’s a sizeable chunk. This means the average retiree using Flexi-Access Drawdown is accessing their pension at a rate of between 6% and 9% annually, far higher than the recommended percentage.
Of course, the figures only give a snapshot of the state of pensions across the UK. For instance, retirees may be running down smaller pensions or know they have other sources of income or savings to fall back on. However, overall it suggests pensioners are taking too much too quickly out of their pensions.
What is a sustainable amount to withdraw from pensions?
The general rule of thumb that’s often cited in response to this question is 4% annually. But given increasing life expectancy, some people suggest it should be lower than this to ensure long-term sustainability.
In fact, research indicates that withdrawing 4% a year means there’s a 25% chance that a pension will be completely depleted within 30 years. It’s not uncommon for modern retirees to spend 30 or 40 years in retirement. If your pension was depleted and you had another ten years left to live, would you be able to cope financially? For this reason, it’s important to understand what’s sustainable for you, whilst balancing it with aspirations.
There’s another problem with the often mentioned 4% annually figure; it assumes retirement spending is static.
Retirement today is rarely linear. Depending on plans, there’s likely to be points where you’ll take more or less income to reflect lifestyle changes. Perhaps you’ll spend more in the first couple of years of retirement, fully enjoying the extra free time you have, before settling into a more relaxed lifestyle that requires a lower income. However, ten years down the line you may decide to provide financial support to family, book a once in a lifetime holiday or take up some form of work, changing the amount you need to take from a pension. As a result, defining a sustainable withdrawal level is often far more complex than it first appears.
Making your pension last a lifetime
Whilst calculating a sustainable level of income to withdraw from a pension can be difficult, it should be considered essential if you choose to use Flexi-Access Drawdown. So, what can you do?
- Consider longevity: No one wants to think about dying, but life expectancy plays an important role in pension planning. Thinking about how long you’re likely to be in retirement for is a step in the right direction for making sure your pension lasts a lifetime. It’s worth noting here that many people in their 50s and 60s underestimate their life expectancy, potentially placing them in financial difficulty in their later years.
- Think about your ideal lifestyle: As mentioned above, some retirees will see their required income rise and fall throughout their life. Having a rough idea of the lifestyle you want and whether it’s likely to change as the years go by can help you plan for these peaks and dips. Taking out more at certain points may be viable if you reduce income at other times.
- Frequently review plans: Whilst the above is important, plans can and do change. What you want from retirement now may turn out to be vastly different from what you want in five years. For this reason, it’s essential to keep coming back to your withdrawals and value of pensions.
- Maintain some investments: In the past, it was common to lower investment and risk as you entered retirement to reduce exposure to volatility. However, investing can be a way to deliver returns on a pension, increasing how much can sustainably be withdrawn. When you look at how long retirement will last, it’s likely you can take a long-term investment approach with at least some of your pension savings. Of course, investing needs to be weighed up with other areas of finances, as well as overall attitude to risk.
- Plan for scenarios out of your control: The unexpected can still happen in retirement. What would you do if investment volatility meant pension values dipped in the short term? How would you pay for an unexpected, large bill? Could you cover the cost of care? Building some leeway into your financial plan and withdrawal levels to cover the unexpected can make your strategy more sustainable.
- Work with a financial adviser: It can be hard to understand how your wealth will change over time, and numbers on a page can offer little context. Working with a financial adviser to discuss your initial retirement plans and reviewing regularly can provide you with a plan you have confidence in. Tools like cashflow planning can also help you visualise how different withdrawal rates will have an impact.
As you approach retirement, it can seem like there are many complicated decisions to be made, not least how much to withdraw from your pension. We’re here to offer you guidance and support as you plan your retirement finances in a way that suits your aspirations, priorities and lifestyle.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
You may have heard in the media concerns around the standard of advice some Defined Benefit pension holders have received. Usually, when they’ve explored the option to transfer out.
To combat this and give those with a Defined Benefit pension, also known as a Final Salary pension, the confidence to seek advice when needed, the Pensions Taskforce launched the brand-new Pension Transfer Gold Standard. It provides those planning their retirement with an easy way to identify where they can find high-quality pension advice they can rely on.
We’re thrilled to reveal that we have adopted the Gold Standard as part of our ongoing commitment to build relationships with clients based on trust. If you have a Defined Benefit pension scheme, we understand there are many reasons why you may be thinking of transferring out. By voluntarily adopting the Pension Transfer Gold Standard, our goal is to give you confidence in our expertise when you approach us for advice.
What is the Pension Transfer Gold Standard?
The new Pension Transfer Gold Standard is a code of good practice that financial advice firms can voluntarily adopt, led by the Personal Finance Society. It aims to safeguard those who want advice on whether transferring out of a Defined Benefit pension is right for them.
The code incorporated nine principles for financial advisers to follow:
- Helping you understand when advice is appropriate
- Ensuring advice given supports your overall wellbeing in the context of your stated objectives
- Ensuring you understand and accept all charges
- Ensuring the most appropriate and updated technical skills are applied
- Transparent management of conflicts of interest
- Helping you understand the cost of transferring benefits
- Avoiding unregulated investments and introducers
- Transparency in advice processes and outcomes
- Promoting the Consumer Guide to the Pension Transfer Gold Standard
What does the code of practice mean for you?
Our main aim of adopting the Gold Standard is to help those seeking advice on their Defined Benefit pension understand the nature of this advice and give assurances that they’re in safe hands. As part of adopting the Pension Transfer Gold Standard, we’ve committed to demonstrating high levels of financial and technical knowledge to deliver high-quality advice to every client.
Transferring out of a Defined Pension can affect your pension income for the rest of your life. It’s important that you fully understand the implications of any decision and have complete confidence in those advising you. The Pension Transfer Gold Standard help to give you certainty that both our firm and the adviser you’re working with have your best interests at heart throughout the process.
If you have a Defined Benefit pension and would like to explore the options you have, please contact us.
Leasehold homes have been in the press a lot recently; and not in a good way. Some homeowners have found themselves trapped in leasehold properties with escalating costs and little opportunity to sell. If you’re considering moving home and a leasehold property has caught your eye, there are some areas to be aware of.
Leasehold vs freehold
Most properties in the UK are sold as freehold. This is where you purchase both the property and the land. Your purchase of a freehold has no time limit.
Leasehold properties, on the other hand, you purchase for a fixed period, for example, 90 years. Once the fixed period is up, the ownership of the property reverts back to the person or organisation that owns the freehold. You only buy the property, rather than the land that it stands on. As a result, you’ll need to pay ground rent and potentially other costs, such as maintenance fees.
If you’re hoping to purchase a flat, you should expect it to be a leasehold. However, while most houses are freehold, a growing number are being sold as leasehold. For housebuilders, it provides an extra stream of income, but as a homeowner, it can mean your outgoings are higher and restrictions are imposed. The government has recently imposed restrictions on charges for newly built leasehold sales, including capping ground rents. But you should still take the time to fully understand your leasehold.
After buying a leasehold property, it may be possible to purchase the freehold, allowing you to take ownership of the property and land it’s built on. If this is how you want to proceed, ensure you factor these additional costs into your budget and be aware that the freehold can go up in price and change hands.
Leasehold property checklist
Purchasing any property is a big decision. You should always take the time to carefully look through contracts, surveys, and potential restrictions. With a leasehold property, there are a couple of additional things to keep an eye out for:
1. Length of the lease: When they begin, leases are usually long term, often 90 or 120 years. However, it’s a key figure to check especially if you’re not the first homeowner. Typically, you’ll struggle to get a mortgage for or sell a property that has less than 70 years remaining on the lease. It’s often possible to extend a lease on a property, though this will come at a cost.
2. Ground rent: The affordability of a leasehold property will depend on ground rent. This may be a monthly or annual bill you pay as you don’t own the home your land is on. Some ground rents will be capped, while others may escalate quickly. Make sure you check how much the ground rent is now as well as when and how it will increase in the future. Some homeowners have found their ground rent doubles every decade, turning a relatively small fee into a significant bill in the long term.
3. Service and maintenance fees: In addition to the ground rent, you are also likely to have to pay service and maintenance fees. Again, if you fail to factor this into your calculations when testing affordability, you may find you struggle to afford payments. You may also be asked to contribute additional sums to the maintenance of the building depending on the terms of your lease.
4. Alterations: When purchasing a home, you may have an idea of changes you’d like to make, perhaps updating the bathroom or simply giving it a fresh lick of paint. However, with a leasehold, you may have to seek permission from the freeholder before you make any changes. Some families living in leasehold properties even have to pay to make alternations, which may mean plans end up stretching budgets.
5. Restrictions: As the freeholder still retains ownership of the house to some degree and the land, they may also name other restrictions within the leasehold. Some of these could impact your lifestyle, such as pets not being allowed within the property. In other cases, they will have little to no impact on your decisions. However, it’s important to be aware of what the restrictions are and think about how they will affect your ability to sell the leasehold.
6. Ability to purchase freehold: If you hope to buy the freehold in the future, start making enquiries about it as soon as possible. This will help give you an idea of whether the property is right for you in the long term. Keep in mind, though, that the terms of sale set out now may not be the same in a few years’ time.
If you have any questions about purchasing a property, including a leasehold home, please get in touch, we’d be happy to help.
Retirement is a huge milestone and one that’s lasting longer for many people. You now have more choice around when you want to retire, how to take an income, and what you want to do after you’ve given up work. Whilst more flexibility has certainly been welcomed, it can present you with some challenging decisions too.
Retirement used to be associated with kicking back and taking it easy. That might still be an important part of what you’re looking forward to. But, today, retirement is just as likely to be associated with new experiences. It’s not just the retirement lifestyle that’s been transferred over the last few decades either. As life expectancy has increased, our time after working lives has gotten longer too. It’s not uncommon for people to spend 30 or even 40 years in retirement.
On top of these two key factors, the way we take an income in retirement has changed as well. The introduction of Pension Freedoms in 2015 gave retirees far greater flexibility when they decided to access the money saved into a pension. It means retirement no longer follows a fairly similar path for most; retirement can be what you make it.
Financing a longer retirement
When you think about retirement planning, it’s often the financial side that first springs to mind. That’s natural, after all, it’s your finances that will allow you to achieve aspirations you may have.
Spending longer in retirement will clearly have an impact on finances, as they’ll need to stretch further. As a result, you’ll need to think carefully about how you’ll access the provisions in your pension and how you’ll use other assets. Purchasing an Annuity, which provides a guaranteed income for life, can offer security, but it may not suit your lifestyle.
On the other hand, your pension can remain invested and accessed flexibly using Flexi-Access Drawdown. But you’ll need to ensure you’re accessing your pension in a way that’s sustainable and considers life expectancy. If you only plan to make withdrawals for 20 years but end up living for another decade, it could place you in a financially vulnerable position.
Your life expectancy is a crucial part of calculating a retirement income and setting out your goals. However, it’s not just finances that should be considered in a longer retirement.
When and how to give up work
Have you thought about when you’d like to give up work? You may have a firm plan or a rough idea in your head, but if you’ve not considered life expectancy, you’re missing a crucial factor. If retiring at 60 means you’ll have four decades of not working, would it still appeal to you? For some, that will sound like a dream, but for others, it will give a reason to rethink.
In addition, you should think about how you’ll retire. More workers are attracted to giving up work gradually. Whether it’s cutting down current working commitments or launching a business, blending retirement and work is becoming more common. You may even decide to give up work entirely for a set period of time, before returning to the world of work further down the line. When you think about longer retirements, it makes sense that some will want to continue employment in some way once they pass traditional retirement age.
Filling your time in retirement
How do you plan to fill your days when you’ve retired? What one-off experiences do you want?
Answering these questions is important to create a retirement lifestyle that suits you. Perhaps you’re looking forward to spending more time with grandchildren, have grand plans to travel, or want to invest your free time in a hobby that’s been neglected.
However, whilst retirement is a time to look forward to, will you still be happy and fulfilled a few years into it? This is where planning your lifestyle is important. Retirement can promise much, but leave something to be desired if you don’t think about what’s important to you and set out priorities. Keep in mind how long you’re likely to spend in retirement as you set out making plans that will fill your time.
Of course, the above considerations are still linked to finance too. If you’d like help understanding what your retirement provisions could offer you and how to achieve your goals after giving up work, please contact us.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
One in three middle-aged Brits is set to retire on the State Pension alone and many more face a shortfall in their pension. It could leave a significant gap between expectations and reality. If you’re not sure what income your pension could deliver in retirement, checking sooner rather than later gives you an opportunity to plug the gap.
Based on the spending habits of those that are already retired, Nationwide estimates that those retiring in the future will be almost £400 short each month. Over the course of a 15-year retirement, it leaves a shortfall of £68,000. When you factor in that those considered middle-aged today are likely to be in retirement for longer than 15 years and many will want to enjoy a comfortable lifestyle with some luxuries, such as holidays, the gap is even more significant.
The research also found:
- Less than one in ten workers that are middle-aged have clear retirement goals
- 52% are worried about affording retirement and 43% believe they won’t be able to afford the lifestyle they want
- Just four in ten have a private pension in place
- Over half of those saving into a pension don’t know the value of it
How much you need to save for retirement is dependent on the lifestyle you want to enjoy once you’ve given up work. However, if there is a potential shortfall, the sooner you discover it the greater the opportunity you’ll have to take action, whether you’re planning a retirement that’s focussed on taking it easy or one filled with new experiences.
What is your target income in retirement?
The first step to take is to calculate the level of income you need for retirement.
Many retirees find that their overall expenditure decreases once they give up work, as travel and other associated costs will be reduced. However, you may be planning to invest more in hobbies, family and travelling, for instance. When working out a target income, be sure to include both the essential bills and those luxuries you’re looking forward to, as well as any large one-off costs that will come out of your pension too.
To give you a general idea, Which? research indicates that the average retired household spends around £2,200 a month; £26,000 a year. This covers all the basic areas of expenditure, as well as a few small luxuries, such as European holidays and eating out. Those that enjoyed long-haul trips, new cars and other further luxuries were found to spend around £39,000 annually.
Remember, this is simply an average, your desired retirement income may be different. As a result, it’s important to think about how you’re likely to spend.
The next thing to do is to see how this matches up with your current retirement provisions.
If you’re a member of a Defined Benefit (DB) scheme, you can contact the scheme directly to understand the current level of retirement benefits you’ve built up. This income is guaranteed and often linked to inflation. The accrual rate will be defined too, allowing you to calculate how this income may change between now and the retirement date.
If you hold a Defined Contribution (DC) scheme, again, you can contact the provider to receive the current value of your pension. However, it can be difficult to work out what this means for your retirement income, as contributions may change, and the savings are typically invested. This is an area we can help with.
You may have more than one pension, and possibly a mix of both DB and DC schemes; make sure you check them all.
What should you do if you find a shortfall?
After you’ve done the above, you may find there’s a gap between your expected income and how much you need for the lifestyle you want. Don’t panic, uncovering a shortfall now is far better than not finding out until you reach retirement, when your options may be limited.
So, what options do you have? Among them may be:
- If you haven’t already, check your State Pension projection. With the State Pension paying £8,750 each year, assuming you have 35 years on your National Insurance record, it serves as a useful foundation to build the rest of your retirement income on.
- Increasing your contributions is one of the simplest ways to increase your pension pot if you have the earnings to do so. This may also mean you benefit from further tax relief and employer contributions to boost your savings further.
- Assess how you could use other assets. Few retirees rely solely on their pension to create an income. Take a look at how savings, investment, property and other assets could be used to make up the shortfall.
- Decide where you’d make compromises. If increasing your retirement savings isn’t an option, making compromises is an option. Would you be willing to work for a few extra years to achieve the lifestyle? Could you reduce retirement spending in any way?
If you’re worried about your retirement income, please get in touch. We’re here to help you make sense of where your retirement savings are now and how to get on track with your goals in mind.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulations which are subject to change in the future.