Understanding Your Pension Pot
Understanding your pension pot is crucial to planning a comfortable retirement. A good pension pot at 60 will depend on various factors, including the pension provider, your desired annual income, retirement age, and expected living expenses. As a rule, aiming for a pension pot that can provide a sustainable income for 20-25 years in retirement is recommended. This means considering how much you will need each year to cover your basic housing costs and any additional costs and expenses you anticipate. By having a clear picture of your pension pot, you can make informed decisions about your retirement and ensure you have enough savings to support your desired lifestyle.
What is a good pension pot at 60?
A good pension pot at 60 can provide an income for life or at least a significant retirement period. The size of the pension pot required will depend on individual circumstances, but a general rule of thumb is to aim for a pot that can provide an annual income of 4-5% of its value. For example, a £200,000 pension pot could provide an annual income of £8,000-£10,000. This approach helps ensure that your savings last throughout your retirement years, providing financial security and peace of mind. It’s essential to regularly review your pension pot and adjust your savings strategy as needed to stay on track with your retirement.
What size pension pot do I need?
Retirement is referred to as “the longest holiday of your life”. Early retirement sounds excellent, but putting the right plans in place is essential.
Understanding the average UK pension pot helps set realistic retirement goals and financial security.
Our clients ask questions such as
What is a good pension pot at 60?
“How much money do I need to retire at 60?”
What is the average pension pot?
If I take my tax free cash will I have a shortfall?
This is a question at the forefront of people’s minds. A recent study was carried out for those over 50. It showed that 69% worry about the cost of living and running out of money in retirement. The ability to maintain enough income in retirement was most important.
Most people underestimate how much income they require.
It is vital to have the retirement lifestyle you want. Whilst maintaining your standard of living. Everyone wants to have a comfortable retirement.
Why compromise your standard of living just because you are retiring?
Knowing your retirement plans are possible will give you more comfort.
If anything, your spending will most likely increase, and this is because you have more confidence in your retirement plan.
Financial planning is crucial for all periods of when you retire. But none more so than in the years leading up to and following retirement.
Identifying your goals and objectives is imperative. It is vital to make sure your plans are valid.
A significant pension pot is crucial for maintaining a desired lifestyle in retirement.
Reviewing your plans each year is essential to ensure that you are on course for your desired retirement.
Retirement Age Case Studies
We aim to help you determine the level of pensions and investments you need. The actual amount varies for each person. Let’s look at two examples to demonstrate this:
Client 1 is 53 and looking to retire early at 55. They have an annual income of over £100,000 for most of their career and have become used to the comfortable lifestyle they want to maintain. Their mother is unwell and requires long-term care, which Client 1 pays for.
Client 2 is 62 and looking to the future. They want to retire at age 65. They are on a modest income of £40,000 per year and lead a simple but happy retirement. They have two grown-up children.
Both will require a different income level each year, and the total they need to save for retirement will differ.
Many factors determine how much is enough for you to retire. These include:
State Pensions
Understanding and combining these factors to find how much you need to save for retirement. There are variables such as:
Inflation
Future Investment growth
Interest rates
Taxation laws
Unexpected changes in your situation
Building a retirement plan
The first stage of the financial planning process is to take into account how much you will need in the first year. We will then use the six factors listed to project forward what you need to save and your future income requirements.
We can then determine whether you have enough money to retire on. If you are on track, that is great. We can then review the plan every year.
If changes are needed, we will work with you to find the gaps. You can then consider the changes you need to make.
Estimate Expenditure
As mentioned above, one factor is your estimated expenditure. You can start crunching the numbers using our interactive expenditure form. Fill in how much you spend for each category.
You can then send the form to us. We then add these figures into our software to help develop your plan.
Longevity
We believe it is wise to plan for the worst-case scenario. Many events in life can change your plans.
For example, you may be living longer than you expect. Whilst this is good, it will affect your plans.
Understanding average life expectancy is crucial for planning how long your retirement savings need to last.
The longer you live, the more money you initially need to save. We will factor this in if you have a family history of longevity.
That is why we go further than using ONS age / Life Expectancy. We use assumptions based on your current age and state of health, and we review your plan each year to consider any changes.
State Pension Income
Most people would find it difficult to rely solely on their basic state pension. However, the basic state pension is a valuable income each month. To get the maximum state pension, you need to have paid sufficient national insurance contributions.
Knowing your state pension age and the amount you will receive is vital. The government’s website provides information on when and how much you will receive. You may need to set up a username and password to access the information.
Other sources of income
It is common to have income in retirement from more than one source. This could include personal pensions or workplace pensions. You might have a final salary or defined contribution pension.
A final salary pension provides an income based on your final salary and years of service.
Working part-time is an option if you want to retire partially.
You could withdraw money from tax-free ISA Accounts or have rental income.
No matter your situation, we will take everything into account. This ensures our forecasts about your retirement are as accurate as possible. This way, we can ensure no surprises further down the line.
Dependents and Legacy
We all have loved ones that we will one day leave behind. Most of us would like to make sure our family receive some inheritance. Passing money through the generations is one thing we concentrate on. This could be for your children or grandchildren.
We will consider this when we develop your plan. Similarly, if you would rather spend everything, we can calculate that, too.
Investment Strategy
We can incorporate your current investment strategy into your plan. Our software will use actual investment returns from the past 100 years to estimate your potential investment growth. This applies to the entire life of your plan.
This task is challenging to do. Therefore, you will see a variety of possible outcomes. The outcomes are grouped into four categories: likely, rare, best, and worst. In the middle, you will see your median outcome, which is the most likely.
We can do that if you want to review your investment strategy. Our extensive investment review service involves a complete analysis of your risk profile, including your attitude to risk and your views on sustainable investing.
We will compare alternative portfolios to your existing strategy and work with you to find the perfect match for your plan.
Guaranteed Income Options
Income with guarantees can provide peace of mind in retirement, ensuring that you have a predictable income stream to cover your basic living costs. There are several options available, including:
Annuities: These provide a regular income for life in exchange for a lump sum payment. They can be a reliable way to ensure a steady income throughout retirement, regardless of how long you live.
Final salary pensions: Defined benefit pensions provide income based on your final salary and years of service. Employers typically offer them, and they can be a valuable source of retirement income.
By exploring these income options, you can choose the one that best fits your retirement plans and provides the financial stability you need.
Tax Efficiency and Optimization
Tax efficiency and optimization are crucial in retirement planning, as they can help minimize your tax liability and maximize your retirement income. Here are some tips to consider:
Use tax-free allowances: Make the most of tax-free allowances, such as the personal and annual ISA allowances. These allowances can help reduce the income tax you pay on your retirement income.
Optimize your pension income: Consider taking a tax-free lump sum from your retirement pot, and optimize your pension income to minimize income tax liability. By carefully planning your withdrawals, you can maximise your retirement savings while keeping your tax bill low.
Use tax-efficient investments: Consider using tax-efficient investments, such as ISAs and VCTs, to minimize tax liability. These investments can provide tax-free growth and income, helping you preserve more of your retirement savings.
By focusing on tax efficiency and optimization, you can ensure that more of your retirement income supports your desired lifestyle rather than being lost to taxes.
Annuity vs Drawdown: What’s the Best Option?
Annuity and drawdown are two popular options for generating income in retirement. Here are some key differences to consider:
Annuity: Provides a guaranteed income for life in exchange for a lump sum payment. Annuities can be inflexible and may not keep pace with inflation, but they offer the security of a predictable income stream.
Drawdown: You can take a tax-free lump sum and then draw income from the remaining pot. Drawdown can be flexible, allowing you to adjust your withdrawals based on your needs, but it may not provide an income for life.
Ultimately, the best option will depend on individual circumstances and goals. Annuities may be more suitable for those prioritising financial security and a regular income, while drawdown may appeal to those valuing flexibility and control over their savings. It’s recommended to seek professional advice to determine the best option for your retirement plans, ensuring that your chosen strategy aligns with your financial goals and provides the retirement income you need.
What does a retirement plan look like?
We believe clients should have a clear idea of their retirement plans.
That’s why we provide graphs and figures that relate to your everyday life. Our retirement Service makes it easier to understand the best options.
Cash Flow Planning report
This will detail the information you have provided to us, including any goals or large one-off expenditures. You can then review it and advise us of any changes.
It will give you your plan success rate. Multiple simulations are used to calculate the percentage success rate.
Within the Cash flow planning, there is a section on tax planning
The cash flow charts show assets, liabilities, and income over time.
Annual Suitability Review
As your financial planner, we will review your income with you each year. At this point, we can update your plan and make adjustments.
We consider any significant changes that have occurred or will occur. If necessary, we will also review your attitude to risk.
The FCA also requires us to review your capacity for loss, which is your ability to absorb investment losses. Losses that affect your standard of living need to be reviewed.
Your sustainable spending rate is the review’s vital aspect, and we use this rather than a Sustainable Withdrawal Rate.
Sustainable Withdrawal Rates only refer to pension drawdown. This is how much you can take from your pension and not run out of money.
We believe it is better to look at your entire situation.
Most people have multiple sources of income that they can use. It is essential to figure out how much you can afford to SPEND.
Each year, we can calculate Your Sustainable Rate of Spending.
This tells you how much you can afford to spend each year. We then convert this to a success rate for your plan.
If we recommend changes, they will be personal to your situation. We have produced a blog post on our Income Sustainability process.
Summary
We know that retirement is not easy. The adjustment from full-time work to retirement is a significant change.
Our Retirement Planning service puts you back in control. With our help, you can feel in control and at ease.
Finally, retirement is about enjoying the later years of your life. Money should not be a limiting factor in this, but an enabler. We will make sure your plan allows all your dreams to come true.
Contact our financial adviser to book your initial consultation. We can then discuss how we can help you.
Investment Commentary Q1 2022