I’m a pension late starter. Can I retire on £48k a year?

Edmund Platt, whose business was wiped out by Covid, says he’s never been best at saving. Lauren Almeida reports

Building a pot big enough to fund decades of retirement can be tricky for people who have not faithfully contributed toward a pension for most of their career. Edmund Platt, a 57- year- old from Preston, admits: “I’ve never been the best at saving. I just never got into the habit of thinking of my pension. Now I realised I need a better plan in place.

Mr Platt has worked primarily in retail, working his way to management positions at the supermarket Safeway. His pension pot of £140,000 is a defined contribution one, so it is invested in a mix of stocks and bonds.

But Mr Platt’s career has been interrupted a few times by stints as a van driver. “I started a courier business in early 2020 but we were absolutely wiped out by the pandemic,” he said.

He has since worked for Waitrose part-time, where he contributes £75 a month into another pension pot. Waitrose matches this. “Ideally I want to retire at 67. My partner is still working and is younger, 51. I’d like a monthly income of at least £4,000, including my income from buy-to-lets.”

Mr Platt has a buy-to-let portfolio of three properties in the North West, which generates a rough net income of about £1,000 per month. He also has a stocks and shares Isa worth £38,000, invested in a mix of smallcap stocks and investment trusts. “I’m a very keen investor and enjoy doing the research and listening to podcasts. But I know my portfolio is a bit messy and needs tidying up. Essentially my question is: will I be able to retire at 67 on the level of income I want?”

Mark Ormston Director at Retirement Line

Mr Platt is doing a good job of having a diverse portfolio to help him achieve his goals. If things are left as they are and applying a simple approach, assuming both pensions (with current

Edmund Platt at his home in Bamber Bridge, Preston, Lancashire contribution levels maintained) and the Isa (without any withdrawals or further contributions) grow by 4pc a year, we can predict the pensions to total about £ 225,000 and the Isa to be around £56,500 when Mr Platt turns 67.

After taking tax-free cash from the pensions, if he purchased a 100pc joint life annuity (6.5pc currently) this provides a monthly income of £900. If 4pc a year was withdrawn from the Isa, it would provide £185 a month.

Adding £ 1,000 a month from the buy- to-let portfolio, assuming these remain equal, plus an assumed £1,000 a month from the state pension, Mr Platt has a projected monthly income of just over £3,000, plus cash of £56,250. This cash could be used as income to supplement the monthly income required.

These are only basic assumptions and include an annuity from the outset to cover both Mr Platt and his wife for the remainder of their lives. As he is targeting income, an annuity currently provides higher income than “safe” withdrawal rates from drawdown. Without favourable conditions or taking less sustainable withdrawal rates, he is likely to fall short of his target.

There are several ways he could achieve his targets, other than deferring. One option is to release a property. This provides about £62,000 after capital gains tax. An upside to this approach is it enables Mr Platt to have some emergency savings and support his Isa which is currently used for this purpose.

If he keeps £ 12,000 as emergency funds and puts the remainder in his Isa ( over three years), his projected Isa balance increases to £ 125,000. If he annuitises his larger pension, on the same terms, this produces £ 800 a month. He could use his smaller pension as a “bridging pension”, depleting the fund over six years, until his wife is of state pension age.

This could be achieved through a drawdown plan or fixed-term annuity.

The annuity would currently provide £295 a month for six years. This provides Mr Platt with £2,100 a month in pension income (including the assumed state pension). He would also get £900 a month from his buy-to-let portfolio (after releasing one property), taking his projected monthly income to £3,000.

With the £56,250 tax-free cash from his pensions and now with emergency funds in place, this could be invested in something risk-averse such as gilt funds and a sustainable amount can be withdrawn, providing, say, £250 a month. A similar approach can be taken to his Isa to provide the remaining £750 a month.

Georgia Ball Wealth planner at Kingswood

Invested heavily in small- cap stocks that’s overweight in sensitives and cyclicals but underweight in defensives, it’s unsurprising that Mr Platt’s Isa is showing a 12pc loss in the current market.

The substantial technology allocation is concerning as this sector may fall further, with the Nasdaq declining by 5.8pc in September.

While small- cap stocks experience higher volatility, they offer the possibility of decent returns over long periods, as demonstrated by the S&P SmallCap 600 index which has returned 13pc each year on average since Jan 2012. By comparison, over that period, the MSCI World index, which tracks global stocks, delivered an average annualised return of 13pc and the FTSE 100 returned 7pc each year on average.

He should review his Isa portfolio as some stocks held are very low ranking, while considering stocks that targets capital growth and reinvests any dividend income. He may also consider a more defensive portfolio as he approaches 67 to minimise the potential for losses at the final hour and once in retirement, should focus on income stocks that preserve capital. I would suggest a multi-asset fund.

It’s concerning that Mr Platt has no emergency fund and relies upon his Isa for this. Given the small-cap investment strategy, this presents a possible liquidity issue. He should look to sell some of his Isa holdings to allocate a suitable emergency fund.

He considers his Waitrose pension negligible, but a 16pc contribution could offer considerable compound growth over the next decade.

If his Safeway pension achieved 5pc annual growth based on a balanced risk approach, a 4pc withdrawal rate would generate an annual income of £9,121.

Assuming the net profit from his rental portfolio remains at £13,874 a year, and he’s eligible for a full state pension, this, combined with the income generated from his Isa portfolio, the value of which is based on the assumption he contributes the maximum each year and achieves the same annualised return the S&P SmallCap 600 delivered since Jan 2012, would generate a total annual gross income of £ 53,050, which is £4,420 each month.

If we were to assume the S&P SmallCap 600 was to continue on the same trend over the next decade, and we were to apply this rate of growth to Mr Platt’s Isa, without any additional contributions, a value of £124,720 could be attained, generating £4,988 a year assuming a 4pc withdrawal rate.

Contributing even £200 per month could boost this fund value to £ 168,120, providing an income of £6,274 a year if withdrawing the same rate of 4pc.