HOW TO MAKE YOUR PENSION LAST FOR LIFE!
Thousands are using new freedoms to dip into their pension pots when they like — but experts fear many will run out of cash. Here’s how YOU can avoid disaster...
TODAY Money Mail launches a major new series of pullouts that’ll give YOU the power to squeeze the most from your nest egg in retirement — without running out of cash.
Over the next five days our indispensable guides will arm you with the tools to enjoy your golden years, safe in the knowledge that your pension isn’t being whittled away too fast.
Getting an income from a pension used to be so simple. You clocked off from work for the last time then bought an annuity with your pot.
The annuity — an insurance product — paid a fixed income that was guaranteed to last as long as you lived.
The problem was that millions of savers were sold shoddy deals that robbed them of vital funds.
So in 2015, after years of campaigning by Money Mail, the Government changed the rules. Now nobody has to buy an annuity unless they want to.
Once you reach the age of 55 you can treat your pension like a cash machine, taking out as much — or as little — as you like, whenever you want.
The rules apply to anyone with a pension linked to the stock market — not a final salary- style plan — who hasn’t yet bought an annuity.
Yet with these terrific new powers came a ton of extra responsibility.
To put it bluntly, if you withdraw too much too quickly, you could run out of cash mid-way through retirement. You could also be left with nothing if you invest the cash in the wrong fund — or entrust your savings to an expensive pension provider with hefty annual fees.
At the heart of the challenge is the million- pound question: How much can you safely take out of your retirement fund each year to ensure your pension lasts for life?
The answer, according to experts, is 3.2 pc. That’s £3,200 a year taken from a £100,000 pot, £1,600 from a £50,000 fund or £640 from a £20,000 pension.
To calculate the figure, investment research gurus Morningstar took a 30- year horizon — a 65-year- old living until the age of 95.
It worked out the safe withdrawal rate for a married couple, both 65, who put about £4 in every £10 of their pension pot in the stock market and the rest in bonds and other products. This is vitally important. As we explain on the next two pages, the vast majority of savers will now leave most of their money invested in the stock market in retirement.
This is because most people can now expect to be retired for several decades — so you need to give your money a chance to grow as you take a steady income. Based on the history of the stock market, bonds and cash, Morningstar found you’d have an eight in ten chance of still having money in your pot when you died if you withdrew 3.2 pc a year.
So, if you wanted to take £10,000 a year in income you’d need to save up £312,000. To have virtually no chance of running out of money, annual withdrawals should be cut to no more than 2.5 pc of the pot.
Morningstar chief investment officer, Dan Kemp, says this could be even lower if investment returns don’t pick up.
‘The margin for error is slim, so it is important to keep investment costs low,’ he says.
On the next two pages we explain how to switch to a cheaper pension provider.
The amount you do withdraw will depend on whether you want to burn through your money so there’s nothing left at your death or leave some in your will. It’s impossible to predict when we’ll die, so if you want to keep the fund intact you can take out what’s called the ‘natural yield’.
This means just withdrawing the annual interest or dividend payments that your fund generates.
Andrew Oxlade, of investment firm Schroders, says: ‘Nearly half of those withdrawing money from pensions may be doing so at an unsustainable rate, according to our analysis of industry figures.
‘Finding a decent income has become harder as interest rates around the world have fallen.’
In Monday’s pullout we will guide you through the best investment funds for income in old age. Jason Hollands, director of investment firm Tilney, says: ‘Lifespans have risen considerably in recent years. It’s easy to underestimate how long you’ll live.
‘If you are spending too much today you are just robbing yourself of vital income tomorrow.’
Laith Khalaf, Hargreaves Lansdown analyst, says: ‘It’s prudent to withdraw funds slowly, then later you’ll feel less worried about dipping into the capital.’