People are living for longer, which means we all need to save as much as possible if we want to be sure that our pensions will provide us with enough income to last for the rest of our lives.
After all, no-one wants to run out of money in retirement. However, it can be really difficult to know how much you can take from your pension to top up any other income you receive, such as the State Pension, whilst ensuring your money doesn’t run out.
Steep living costs make this particularly tricky, and you may be particularly concerned about how long your pot will last given that we’re all paying more for things like energy, petrol and food.
In this article, we look at which factors might affect how long your pension may last in retirement, and how to work out when you might run out of money.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
What affects how long my pension will last?
There are several factors which will determine how long your pension will last in retirement, and one of the most important is how you’ve chosen to take income from it.
If you’ve decided to leave your defined contribution pension savings invested to grow over time while taking an income as and when needed, you’ll be using pension drawdown. This is sometimes known as flexible drawdown, or flexi-access drawdown. Find out more in our article What is pension drawdown and how does it work?
However, there’s the risk that you could run out of money if you take too much too soon from a pension drawdown plan, so it’s worth seeking professional advice if you’re not sure how much to take out. Other factors which will affect how long your pension will last include:
1. Your life expectancy
Despite life expectancy falling during the pandemic, average life expectancy in the UK rose to 82.2 years in 2022, compared to 81.7 in 2020, according to latest figures from the Office for National Statistics (ONS).
Current average life expectancy in the UK from the age of 65 is around 19 years for a man and 21 years for a woman. If you stop working and cash in your defined contribution pensions at age 55, this means that you’d need your pension to last for up to as long as three decades. If you want to learn more about defined contribution pensions, read our guide What is a defined contribution pension?
However, most of us won’t retire until we reach our 60s or beyond, and many people are choosing to phase their retirement. You may therefore only dip into your pension a little to top up income from a part-time job, for example, before you stop working for good. Read more in our article How can I phase my retirement?
2. How much income you'll need in retirement
According to the latest research from consumer association Which? if you want to retire comfortably, you’ll need an average income of about £26,000 a year after tax if you’re a couple, or £19,000 if you’re single. In addition to a full State Pension of £10,600 a year as a couple for the 2023/24 tax year, together you’d need to produce an extra combined income of around £4,800 a year to achieve this.
However, the actual amount you’ll personally need will depend on your outgoings, and is currently likely to be higher as the cost of food and energy has risen sharply. You’ll need to consider how much you need to cover your basic outgoings, such as your mortgage, council tax and other bills, and perhaps a few luxuries such as a holiday and the odd meal out. Read more in our article Can you afford to retire?
If you have a final salary or defined benefit pension, you don’t need to be concerned about how long your pension will last. The income you’ll receive in retirement is based on how many years you’ve belonged to the scheme, and a proportion of your final year’s pay, and this is a guaranteed sum that will be paid to you for the rest of your life. You can learn more about defined benefit pensions in our guide What is a defined benefit pension?
3. Inflation
The cost of living will also have a big impact on how long your pension will last in retirement, as rising prices will mean you’ll need a higher income to make ends meet. Inflation jumped to 2.3% in the 12 months to October, its highest level in six months. Read more in our article What does 2.3% inflation mean for my money?
This makes it more difficult for your pension to keep pace with inflation. As inflation hopefully eases, however, you may find you can lower the amount you need to take out each year to cover living costs. Find out what you can do to beat inflation in our article How does inflation affect my pension?
4. Stock market performance
If you’re using a pension drawdown plan in retirement to provide some of your income, you’ll remain invested in the stock market.
The size of your pot and how long this’ll last is therefore partly dependent on the performance of your chosen investments. Where you invest your pension savings while you draw an income from them will depend on your approach to risk, your time-frame and objectives. However, it can be difficult to know where to invest and how to manage your investments during a turbulent economic period. Find some tips in our article 9 tips for maximising your pension in difficult times.
5. Type of pension
As mentioned, how long your pension will last in retirement and the above factors are only usually a concern if you have a defined contribution pension (also known as money purchase plans). If you have a defined benefit pension (also known as a final salary pension) you will receive a guaranteed income for the rest of your life that will increase alongside inflation. This type of pension is increasingly rare, as they are expensive for employers to offer.
How much income will your pension provide you with?
To calculate how much income your defined contribution pension will provide you need to check the amount you have saved in your pot.
This can be used to work out how much your pension may pay out in retirement. You may have paid into a number of different pensions over the years, so this could involve tracking down several accounts. Consolidating, or combining, your pensions can make managing your money and doing these calculations more straightforward, but won’t be right for everyone, so it’s a good idea to seek financial advice if you’re considering doing this. Find out more in our article Should I consolidate my pensions?
You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.
If you’re thinking about getting independent financial advice, financial services company Fidelius is offering Rest Less members a free initial consultation with an independent financial advisor to chat about your finances, where you are now, and where you want to go.
There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved. Fidelius is rated 4.7/5 from over 1,250 reviews on VouchedFor, the review site for financial advisors.
However, even if you do have all the figures you need to hand, it can be hard working out whether you’re on track for a comfortable retirement, and how much your pension is likely to provide. Fortunately, there are plenty of online calculators that can tell you how much income you’re likely to receive from your pot. Learn more about these in our guide Five of the best pension calculators to help you plan for retirement.
For example, a £150,000 pension pot at age 66 could provide an income of £4,000 a year using drawdown until beyond age 100, according to the calculator.
That’s assuming you withdraw the maximum of £37,500 tax-free cash at the outset. It is based on underlying investment growth of 3%, but this depends on the performance of your particular investments. It also assumes inflation at 3% and charges at 0.6%, but both of these are variable, and of course inflation is currently lower than this at 2.3% in the 12 months to October.
Remember to factor in how much State Pension you will receive too, as this may form the foundation of retirement income. The current full new State Pension is £221.20 a week in the 2024/25 tax year. Read more in our article How the state pension works.
How long will your pension last before you run out of money?
Which? offers a specific drawdown calculator which can help you work out how long your pension pot might last based on the income you need, and other factors such as how much tax-free cash you want to take out, and where your savings are invested.
Here are some examples, showing how long your pension pot might last based on the income you need, but remember that these are based on a number of variables, such as inflation, and the value of your investments, which can fall as well as rise. The market can experience big falls, which can be very worrying for pension investors approaching and in retirement. Meanwhile, rising inflation will reduce retirees’ spending power.
Example 1
You have £100,000 in your pension pot.
You choose to take 25% of this as a tax-free lump sum, leaving you with £75,000 to remain invested.
You have a low appetite for risk, so choose a cautious portfolio, mainly invested in cash and fixed interest investments.
Assuming you’d like to draw down an income of £5,000 a year from this to supplement your State Pension, and you’d like to increase this by 2% each year, you can expect to run out of money after 17 years.
Example 2
You have £150,000 in your pension pot.
You choose to take 25% of this as a tax-free lump sum (£37,500) leaving you with £112,500 to invest.
You have a moderate appetite for risk, so choose a portfolio which is mainly invested in fixed interest investments and stocks and shares.
Assuming you’d like to draw down an income of £8,000 a year from this to supplement your State Pension, and you’d like to increase this by 2% each year, you can expect to run out of money after 19 years.
Example 3
You have £200,000 in your pension pot.
You choose to take 25% of this as a tax-free lump sum (£50,000) leaving you with £150,000 to invest.
You have a strong appetite for risk, so choose a portfolio which is mainly invested in stocks and shares, partly in fixed interest investment and has a small cash reserve
Assuming you’d like to draw down an income of £12,000 a year from this to supplement your State Pension, and you’d like to increase this by 2% each year, you can expect to run out of money after 17 years.
As noted, these examples are based on a number of assumptions, which are highly variable. They assume that cash grows at an average of 0.50% a year, fixed interest at 4.75% a year and stocks and shares at 7.25% a year. Calculations also assume annual pension charges of 0.3%. However, recent stock market falls have impacted how long retirees can expect their pension pots to last and the economic climate can be highly unpredictable.
Whether or not you take the 25% of your pension as a tax-free lump sum will also affect how long your pension will last for. If you can afford to leave this invested, or take a reduced amount, this could substantially increase your retirement income over the long term. Find out more about the pros and cons of taking tax-free cash in our article Should I take tax-free cash at 55?
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