Can you be sure your pension pot will last if you live to be 100?

THE City watchdog has issued another warning about the dangers of being tempted to blow our pension savings.

It’s easy to be blasé, but if we’ve slogged and saved for a comfortable retirement, we should make sure the money lasts a lifetime.

The alternative is to rely on an increasingly overstretched state when we are highly vulnerable.

But how long do we need the money to last? The Office for National Statistics says that men aged 60 to 65 are likely to live to 86 and women to 88.

Yet, due to the way average life expectancy is calculated, more than half could live longer.

The key point is that they have a one in four chance of living to 94 and 96, respectively. And a fifth of women aged 55 are likely to see their 100th birthday.

If retiring at 65, it’s not so much a case of planning for 20 years as for 35 because, in any couple, there’s a fair chance that one will make it to their late 90s.

Our pensions need to last a long time. My mother-in-law and her two sisters, for example, are in their naughty 90s. All are sprightly, active and looking forward to hearing from the Queen.

Lamborghinis may have passed them by, but lavish birthday parties, holidays and the odd treat certainly haven’t.

Mrs H and I both have some final-salary pension to provide a basic income. But I’ve spent much of my working life as a freelancer and Mrs H, like many women, has taken career breaks and worked part-time. So we are also relying on our stock marketinvested pensions and Isas.

For those without a guaranteed pension, the option of turning part of your pension into an annuity, to pay income for life, remains. However, rates remain pitifully low. A 65-year-old couple who are seeking an inflationlinked income might get £3,200 a year at best by giving up a £100,000 pension pot.

If the person buying the annuity dies, their widow or widower would get half of the income for the rest of their life.

Shares and investment funds can generate income and provide inflation protection, albeit with stock market risk.

And, as opposed to an annuity, if one partner dies, the survivor continues to get the full income.

But how much can you take? Well, if you make 6 pc on your investments, restricting your income to 3.5 pc should allow you to keep pace with inflation. On a £100,000 pension fund at age 65, you’d start with £3,500. By age 90, you’d have a £176,000 fund paying £6,160 income a year.

Take 5 pc income (£5,000) then, at 90, income would have grown to £5,952 with a £119,000 fund.

So spending power would fall as inflation bites and it would become more likely you’d need to dig into your capital.

Graham Spooner, investment research analyst at The Share Centre, warns there are question marks over the sustainability of some share dividends, pointing out that the yield (that’s the income as a percentage of the share price) on some big companies has been rising. ‘This heightens uncertainty — if the yield looks too good to be true, then there is every chance it is.

‘It would not come as a huge surprise if, going forward, phrases such as dividends being lowered become more prevalent.’

He says stocks that could be interesting for retirement income include pharmaceutical company GlaxoSmithKline, with a 5.3 pc yield, global alcoholic beverages group Diageo (2.44 pc), which should benefit from growth in India and China, contract caterer Compass (2.2 pc) and Lloyds Banking Group (5.3 pc).

Note that these are examples, not recommendations.

Direct share investment is cheap, but involves homework. If you prefer someone else to make the decisions, then investment funds are an option.

Sanlam UK publishes analysis highlighting the most consistent for producing income, while looking at risk and total return including capital growth.

Among the most consistent over the past five years, according to this report, have been Slater Income, paying 4.3 pc, Axa Framlington Monthly Income (4.37 pc), LF Miton UK Multi Cap Income (4.07 pc), Artemis Income (4.22 pc) and Marlborough Multi Cap Income (4.37 pc).

Investment trusts can offer lower costs than other investment funds. These firms invest in the shares of other companies.

The Association of Investment Companies publishes a list of dividend heroes that have increased the income they pay year on year. At the top is the City of London Investment Trust, with 52 years of increases. It currently pays 4.46 pc.

The Bankers Investment Trust (2.3 pc), Alliance Trust (1.83 pc) and Caledonia Investments (2.05 pc) also boast more than 50 years. Murray Income (4.58 pc) has 45 years and the Merchants Trust (5.19 pc) 36.

Investment trusts have the flexibility to hold back up to 15 pc of the income they receive in dividends, allowing them to dip into these reserves in bad years.

But dividend income isn’t the be all and end all.

There’s nothing wrong with taking some profits from capital growth as your income.

It’s our money. We just shouldn’t spend it all at once!