Recent turmoil in global markets is just another thing causing many people more anxiety as they look at the value of their pension plans, which have typically taken quite a hit over the last month or so. It’s at best dispiriting and at worst frightening to see how they’re suddenly worth a lot less on paper.
For those coming up to retirement, those long-awaited dates and plans may now be called into question. Do recent events mean you need to re-think your retirement?
To get to the bottom of this, we think there are three initial questions you should consider.
- How much money will I need in retirement?
- How much money will I need to have saved to achieve this?
- What are my other potential sources of income?
First question – how much money will I need in retirement?
Of course this will depend on the type of retirement you’re planning – baked beans and caravans, or caviar and hotels. But the following amounts provided by industry body, the Pensions and Lifetime Savings Association*, are helpful starters for 10.
Minimum income each year
Single people: £10,200
This amount “covers all you needs, with some left over for fun and social occasions. You could holiday in the UK, eat out about once a month and do some affordable leisure activities about twice a week.”
Moderate income each year
Single people: £20,200
For those hoping for a little more fun, these so-called ‘moderate’ amounts are said to provide, in addition to the minimum lifestyle, “more financial security and more flexibility. You could have one foreign holiday a year and eat out a few times a month.”
Comfortable income each year
Single people: £33,000
Finally for those wanting to occasionally push the boat out, the ‘comfortable’ level “allows you to be more spontaneous with your money. You could have a subscription to a streaming service, regular beauty treatments and two foreign holidays a year.”
It’s one thing to imagine what you’d like – and another to work out what this means in terms of the current value of your pension savings. So how much might you need to have saved in your pension plan to achieve these standards of living?
Second question – how much money do I need to have saved to achieve this?
Once you’ve decided the level of living standard you realistically want to aim for, let’s see whether your savings will support this.
Let’s start with your pension savings.
“The 4% rule”
This is a very rough rule of thumb, but some financial advisers will sometimes talk about this. It’s based on research which indicates how much you can take out of your pension savings every year in retirement over a 30-year period, and hopefully not run out of money.
So, if your pension savings total £100,000, this suggests that you could take out £4,000 each year for 30 years and the money shouldn’t run out before you do!
The reason this isn’t a precise science is that it depends on what you invest in (this assumes a balanced mix of investments between higher risk equities (shares) and lower risk bonds, how markets perform and, of course, how long you live for. It also assumes that people spend the same amount every year in retirement, which isn’t actually the case. Spending patterns typically decrease as you get older, but might jump again if you need care or support.
However, if you divide your total pension savings by 25, that at least gives you a rough idea what a sustainable annual income might be.
Third question – what are my other potential sources of income?
You might have a ‘main’ pension plan, for example a workplace one through your employer. But you may have several other sources of potential income in retirement, including:
- The State Pension
- Any private pension plans you’ve set up, separate to workplace ones
- Any final salary (also known as ‘defined benefit’) scheme pension income
- Rental income from any properties you let out
- ISAs or other investments
Jot these all down on a piece of paper to try and gather the full picture.
As a rule of thumb, the full State Pension is currently just over £9,100 a year for a single person (paid as £175.20 a week). The government’s website can give you the date at which you’ll be eligible for this, as well as tell you how much you can expect to receive, which will depend on your work history and your National Insurance contributions.
Topping up the State Pension
For those aiming for a ‘moderate’ lifestyle, a full State Pension still leaves you about £11,100 a year short.
This is where any other pension plans and sources of income come in. Add all of these to your State Pension – and that gives you a rough sense of what you’ll have in total each year.
This doesn’t look like enough – what should I do?
If your annual number isn’t looking very healthy, then sometimes the only factor you have left to play with is time.
The longer you can put off your retirement, and avoid the need to tap into your pension savings, the higher the amount you should have in the future.
Finally, don’t forget that markets have just taken a huge pounding. Although it feels hard to see any upside from the relative loneliness of social distancing and self-isolation, it’s our view that things will recover.
We don’t think this will happen over the next few months. But, once the wheels of the global economy start to move again, investments should also start to recover. So when doing the maths, don’t just focus on the value of your pension savings today. For a more balanced view, have a look at what it was six months ago, or a year ago.
And remember, retirement can span several decades, so don’t rush decisions today, or panic sell if you don’t need to – there are consequences for locking in losses today, which may have an impact for decades to come.
Want more information?
For further guidance and support about how the impact of coronavirus might affect your pension plan or investments visit the Pensions Advisory Service website.
It’s also a good idea to consider getting financial advice, as an adviser can provide you with a tailored plan that meets your individual needs. You can find one yourself at unbiased or you can also get financial advice from Standard Life. There’s likely to be a cost for getting advice.
*Source: Pensions and Lifetime Savings Association, 2019.
The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in.
Information is based on Boring Money’s understanding in April 2020.
Standard Life accepts no responsibility for information in external websites. These are provided for general information.