Strategies to help make your pension last

Ensuring your pension lasts throughout your retirement years is crucial. With the right strategies, you can manage your pension effectively and enjoy a more comfortable and secure retirement. We'll now look at some things to consider, but it's important to keep in mind that the information below are simply options you may have and shouldn't be taken as advice. What's right for you will depend on your own individual circumstances.

Understand how much you can withdraw

One of the key strategies to make your pension last is understanding how much you can safely withdraw from your pension each year.

Let’s say someone has £100,000 and they plan to withdraw £4,000 from it every year. You might think it would last 25 years. However  if they choose to take flexible cash or income (also known as drawdown), then their pension remains invested as they withdraw from it. This means depending on how the investment performs it could run out sooner or last longer.

For example, if they got a 4% return in the first year and at the end of the year they withdrew £4,000, then the pension would still be around £100,000 (£100,000 + 4% - £4,000). If on the other hand they experienced a 4% loss in that first year and withdrew £4,000 then the pension value would be around £92,000 (£100,000 – 4%  £4,000).

So, how long your money lasts will predominantly depend on how much you withdraw and how the investment performs. As with all investments, they can go down as well as up and you may get back less than you put in.

Be wary of sequencing risk

The risk of an investment dropping in value is one we're all probably familiar with. But did you know, the timing of investment returns can also have a big impact on the value of your pension?

For example, two people with the same size pension could get the same average return but end up with different values depending on the order of the returns. It’s not the easiest subject to understand, but it is very important, so let’s create an example to demonstrate it.  

Alice and Mark each have a pension worth £500,000 and they both take £40,000 from it every year. They choose different investments to each other, but after five years they both receive an average return of 5%. However, the order they got those returns is different. Alice received good returns early on and poorer performance later, whereas Mark’s returns were in the reverse order. Here's the performance each experienced:

Please remember this is just an example and not a recommendation, but the difference this order makes is staggering. Despite having the same average return after five years, Alice has £430,194 in her pension whereas Mark has £344,180. This is sometimes referred to as sequencing risk. If you want to read more about it and the calculations on how they ended up with these values, then please have a look at our ‘market timing article’. 

As you approach retirement, it’s a crucial time for the performance of your pension. Sequencing risk could have a big effect on your whole retirement. However, there are ways to reduce the impact:

• One way is to diversify the pension investments by spreading them across different asset classes such as stocks, bonds and property. This means if one asset class is performing poorly it could be offset by good performance from another asset class.

• Some people keep a proportion of their pension in lower-risk investments. These investments typically don’t experience as much growth but on the flip side they usually don't see as big drops in values as other assets either. These could be used to cover the monthly essentials during market downturns and this helps avoid having to sell other investments at a loss.

• If it's affordable, adjusting the amount withdrawn may be an option. If investments are performing poorly in any given year then reducing withdrawals may help preserve the value of the pension. 

Do you have other income streams?

Any retirement budget should factor in all income streams. Some people have multiple sources of income such as state pension, investments and part-time jobs. Having these other sources of income could help avoid having to withdraw from your pension in times of poor performance and therefore having to sell your pension assets at a loss. This can help protect the value of your pension so it can potentially benefit from better performance in future years.

Would you consider a guaranteed income for life?

You can use some or all of your pension to buy a guaranteed income for life (known as an annuity). This will pay you an income no matter how long you live, so you don't need to worry about it running out.

Some people are under the impression you can only choose one income option from your pension. But this isn't true. Two of the most popular income options are an annuity and drawdown and it's perfectly fine to choose both. This means you could have the security of a guaranteed income coupled with a more flexible option.

Be as tax efficient as possible

If you choose one of the flexible options for your retirement income then you have the ability to manage the amount of income you take. This means you also have a degree of control over the amount of income tax you have to pay. For example, you could withdraw amounts that keep you within a lower tax bracket and thus keeping more for you and less for the tax-man.

Some people also want to keep paying money into their pension after they've accessed it in order to benefit from tax relief. This is still an option but the amount you can pay in each year and benefit from tax relief is less than what it was before you accessed it. Please remember that tax rules can change and the impact of taxation and any tax relief depends on your circumstances, including where you live.

The best way to make your pension last

Navigating the complexities of retirement planning can be challenging and the options we’ve just discussed are not easy to manage, especially without experience.

This is where professional financial advice can make a significant difference. One of the key roles of a financial adviser is to create a retirement plan tailored to each individual's unique circumstances. This involves recommending a retirement product for you, advising on the correct level of income, choosing the right investments and making sure your pension lasts as long as it needs to.

Knowing an adviser is looking after all of this for you can also give great peace of mind and allow you to fully enjoy your retirement. So why not book a no-obligation call with one of our expert retirement advisers today? Simply click the button below.

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