10/09/18How long will your pension last?

Research has found 63% of workers approaching retirement are already planning on working longer than planned. So, do you know how long your pension would last if your retired today?

Financial pressures mean that people are working for longer and often beyond the time they expected. With life expectancy rising, it’s important to assess how long your pension will last for and what income you can expect from it before making any life-changing decisions.

Retiring at the State Pension age, which is slowly rising, means you need to have made provisions to last 20, 30 or even 40 years. The current State Pension is 65 for men and for women it’s gradually increasing to fall in line with this, but the exact date will depend on the year you were born. Changes underway mean that by October 2020 the State Pension will be 66 for both men and women, it’s expected to further rise to 68 by 2037. Of course, if you want to retire sooner, you’ll need to factor this into your retirement planning too.

Partly due to the increase in State Pension age, research has shown that many over-50s are now expecting to work later than planned. Research from Aviva has found that 63% of those approaching retirement already anticipate retiring later than they thought they would 10 years ago.

It’s a change that’s already being reflected in worker demographics. The number of workers aged over 50 has increased by 20% since 2012, and by 2020 it’s expected that a third of the workforce will fall into this age bracket.

While the rising State Pension age is a contributing factor to the number of workers over 50, there are other reasons influencing the decision too. Of those expecting to work for longer, 40% cited the rising cost of living and 38% said they had insufficient retirement savings.

If you’re trying to assess when you can retire, getting to grips with where your pension is at now is essential for calculating how long it will last for.

Assessing your pension and retirement plans

Despite more people working past their planned retirement age, the research revealed there’s a significant lack of support offered by employers. The study of workers aged over 50 found:

  • 9% have access to written literature on financial issues surrounding retirement
  • 11% benefit from free independent financial advice
  • 14% have access to workshops/seminars on retirement finance
  • 3% are offered a list of recommended independent financial advisers (IFA)
  • 6% have a dedicated colleague to talk to about these issues

There’s a clear need for more information too, 44% of older workers said they felt unsupported by their employer. Assessing your pension and how long it will last for can be a daunting prospect. We don’t know how long we’ll live for, making it difficult to know how long your money needs to last. Use your money up too quickly and you risk not having enough later on, on the other hand, you don’t want to be thriftier than you need to be.

However, there are steps you can take to understand how long your pension will support you for.

Working out a baseline for a comfortable retirement

To begin with, you need to work out what level of income you need annually to comfortably retire. This will vary depending on your personal circumstances and what your expectations are. For example, if you expect to have paid off your mortgage before retirement, you can enjoy significantly lower outgoings. In contrast, you may be planning to travel more now that you have more free time, resulting in extra costs.

Industry estimates of how much you should plan for vary but a useful indicator to act as a starting point is around two-thirds of your current salary to maintain your existing lifestyle.

Consider inflation and life expectancy

Once you’ve worked out how much you’d like to receive in retirement income each year, you’ll need to work out how long it should last for. Again, this will vary from person to person, taking into account your health, lifestyle choices, and more. However, most people that are aged 65 today can expect to reach their late 80s or early 90s, with some making it past 100, for younger generations, average life expectancy will be even higher.

On top of this, you need to consider inflation too. What may provide you with a comfortable pension now, might just cover the basics in 20 years when you come to retire. The most recent figures from the Office of National Statistics (ONS) show that 12-month inflation was 2.3% in July 2018.

Using your pension freedoms

Pension freedoms became available in 2015, giving you the option to withdraw a lump sum, with up to 25% being tax-free. It can be an appealing prospect and improve your retirement, for example, if you still have a mortgage remaining it can allow you to pay it off and drastically reduce bills. Alternatively, it could be used to fund a one-off purchase or experience, such as a trip of a lifetime now you’re no longer tied to work.

In most circumstances, any amount of 25% will be taxed at your highest marginal rate. Taking excess income can increase your tax band, so it’s vital you seek advice before doing so.

If you’ve been planning on taking advantage of your pension freedoms, you’ll need to account for this when working out your retirement income once the lump sum has been used.

Determine income from guaranteed sources

Many people will have more than one source of income in retirement. Focusing on those that are guaranteed, go through them and determine what the annual income generated will be. This could include the State Pension, multiple Workplace Pensions, and a private pension you’ve been adding to over the years. This gives you the basis to work out how your guaranteed income sources align with the figure you’ve determined is needed for a comfortable retirement.

Speak to a financial adviser

Speaking to a financial adviser or planner can help you understand where your pension is now, what your expectations are and how to ensure the two match up. Contact us to discuss your current retirement planning and provisions to see how they match your post-retirement plans.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

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