How Long Will My Pension Pot Last When I Retire?

You have put in the time and effort over the years, saving a significant chunk of your earnings into a pension for a well-earned retirement nest egg. But do you know how long your pension pot will last? Hilltop Financial Planning explores whether pensions really are for life, whether they can run out, and the best strategies for ensuring your pension pot lasts as long as you do.

How Many Years Does A Private Pension Last?

There is a crucial distinction between how long a private pension can and should last.

All being well, your pension pot should last for the duration of your retirement through to death. According to UN projections, the average life expectancy in the UK is currently 81.65 years. So, if we round that up to 82, your pension funds need to cover you from 27 years if you retire at age 55 to 16 years if you worked through to the current state pension age of 66 (rising to 67 by 2028).

However, these figures are merely based on projections. You may live longer, or shorter than anticipated. None of us has a crystal ball to predict these things. This makes retirement planning tricky. Of course, a private pension can last much shorter than expected too. It is possible to spend your entire pension pot too early if you are not careful. 

To ensure you aren’t left with a shortfall, it is vital to calculate precisely how much you think you will need.

Factors To Consider When Calculating How Much You Need

So what factors do you need to consider when calculating how much you need in retirement? Here are just a few pointers to bear in mind when calculating your pension income requirements:

• Inflation: Prices can rise at the mercy of inflation, so you need to ensure that you have enough pension funds in reserve to mitigate the rising cost of living. Otherwise, you could be left with a shortfall. Some annuities and defined benefit pensions could increase in line with inflation each year, and potentially the State Pension.

• Secure Income: If you are lucky enough to have been a member of a defined benefit pension scheme, you will receive a guaranteed income for life. If not, you could use some or all of your pension pot to buy an annuity that provides similar benefits. The State Pension is also guaranteed for life.

• Flexible Income: Pension Drawdown is the flexible way of managing and accessing your pension funds. Taking your income when you need it will require greater management and future planning than a fixed annuity policy. Generally, people will need more income in the early stages and later stages of retirement, as you could be more active when you first retire, but also have higher medical or residency bills later in life. With drawdown, your pension funds will remain invested until you need them, so remember that the value of your investments can go down as well as up.

What Is A Good Monthly Retirement Income?

A ‘good’ monthly retirement income ultimately depends on your lifestyle choices. According to recent research by Which? a couple can live comfortably on £2,333 a month or £28,000 a year. For singles, that figure is closer to £19,000 a year (£1,583 a month). This covers essential household bills, eating out, hobbies and European holidays. If you wanted to splash out on regular long-haul holidays and a new car every five years, couples would need £45,000 a year to cover monthly outgoings of £3,750, and for singles, it would be £31,000 (£2,583 a month).

Based on these figures, you would need a pension pot worth in the region of £204,750 to enjoy a comfortable retirement income of £28,000. This is based on a couple purchasing a joint-life annuity that returned an annual income of £9,000, topped up by £19,000 of combined annual State Pension funds. For a post-tax income of £45,000, with the State Pension factored in, you would need a pension pot of £664,450 to buy a joint-life annuity.

How Can I Make My Pension Pot Last?

Here are just a few ways you can make your pension pot last longer:

• Delay taking your pension – If you delayed taking an income from either a defined contribution or defined benefit pension, you could benefit from more growth and a higher income, respectively.
• Maximise your State Pension – You will need at least 35 qualifying years of National Insurance payments to receive the full amount of £185.15 per week. You could fill in any gaps by paying voluntary contributions.
• Consider equity release – If you are a homeowner aged 55 or over, you could consider releasing equity from your home. However, you should consult a qualified financial adviser before embarking on this route.
• Tax efficient savings – If you have extra funds you wish to invest, a tax efficient savings plan, like an ISA could be an ideal way of boosting your retirement pot. Using savings before dipping into your pension pot, could mean your pension is invested longer and potentially grow at a higher rate than inflation. As with any investment, the value of your pension pot can go down as well as up.

What Happens If My Pension Pot Runs Out?

There are several different reasons your pension pot could run out. For instance, if you chose to take your entire pension pot as one lump sum, you could quickly run out of money too soon (and find yourself lumped with a hefty tax bill in the process). Or, if you opted for pension drawdown, you could find yourself in a situation whereby you draw down too much income, your investments fall in value, and your pension pot runs dry much sooner.

The best course of action is to enlist the services of a regulated financial adviser to get some timely retirement planning advice well before your pension pot runs out.

Hilltop Financial Planning: Pension Advisers

Many people underestimate how much income they need in retirement to live comfortably. Without careful planning, you could run out of money too soon. Hilltop Financial Planning can help you to make confident choices about your pension and retirement. Our retirement planning experts are ready and willing to help you plan for the future.

If you would like to know more about retirement planning or to arrange a consultation, please contact us on 0161 413 7051. We are open 9am to 5pm Monday to Thursday and 9am to 4pm on Fridays. Hilltop Financial planning  is authorised and regulated by the financial conduct authority. Our advisers have over 100 years of combined experience and knowledge of working with people like you and helping them to make the most of their finances.