Ensuring you have enough income to last you a lifetime is of one of life’s great financial challenges.
How much retirement income do I need to keep the wolf from the door and live a little? How long will I live for? Do I want to leave something for my children?
These are questions that as you get older become increasingly important. Not just in the ‘decumulation’ stage of life when we begin to run down financial assets – pensions, for example – that we have built during our lives. But also in the accumulation stage as retirement or semiretirement edges ever closer.
Am I saving enough for the future? The answer is probably a big fat ‘no’. It is certainly an issue I have one eye on as I move – too quickly for my liking – through my 50s. Never have I looked so often at how my work pension is performing. Never have I sat down as many times as I have recently and worked out how much pension income I am likely to be able to depend upon once my hair greys and full-time employment turns into part-time work (journalists never stop writing).
Such exercises are both cathartic and terrifying. A couple of weeks ago, I put my pension numbers into an online pension calculator provided by investment platform Hargreaves Lansdown*, assuming that I would be patted on the back for my regular saving.
Far from it. I was told that I was on schedule to ‘retire’ on an income equivalent to 40% of the one I should be aiming for (two thirds of my estimated salary at retirement). I cried into my tomato soup and cursed those past employers early on in my career, which had steadfastly refused to provide me with a pension. I also vowed to go on a savings binge, utilising an under-used individual savings account (Isa) allowance. Less spending. More accumulating.
Do give the Hargreaves Lansdown pension calculator a try, although be prepared to be given a financial fright. (A wee dram of whisky helped me deal with my bad news.) [Moneywise says: To get a second opinion, you can also try the pensions calculator from our parent company, Interactive Investor.]
Of course, coming up with an effective retirement income plan is not easy. For a start, retirement income of £25,000 a year may appear reasonable to some, but a pittance to others. We all have different ambitions that sway how much we are prepared to squirrel away.
It is also hard to determine how much income we need to enjoy the standard of living we hope for in retirement. It is for this reason why the idea of ‘national retirement income targets’ proposed by the Pensions and Lifetime Savings Association (PLSA)**, which represents more than 1,300 pension schemes, is a sound one.
It is an approach that has been successfully adopted in Australia, a country which in the pensions arena is showing the world what to do (it latched on to pension autoenrolment years before we had even thought about it). By introducing such targets, the PLSA believes people would be more minded to save. Its own research indicates that four out of five people believe a national retirement income target would help them plan for later life.
Making your income last for life is now more difficult than ever, and not just because low interest rates are impacting adversely on cash savers. Newish pension freedom rules introduced by the previous government have also made the task more difficult. Taking greater control of your pension fund at retirement is empowering, but it increases the risk of your pension running out before you die. Pension annuities may not be flavour of the month, but at least they provide a guaranteed income until you die.
In such a challenging financial environment, I believe an independent financial adviser (IFA) can provide much-needed assurance. A couple of years ago, I remember speaking to a woman who had agonised over whether she had sufficient money tucked away to retire. But after her IFA, Neil Rossiter at Blackdown Financial in Taunton, ran her numbers through some wizardly financial software, she was reassured. It calculated that her money would not run out unless she lives to age 120. She was thrilled that she could do some of the things she had held back on for fear of drawing on funds she would need for later life.
Good IFAs are worth their weight in gold. They can be found at Unbiased.co.uk or Vouchedfor.co.uk. You can rarely save too much. Give it a try.
Jeff Prestridge is the personal finance editor of The Mail on Sunday. He won the Contribution to Personal Finance Education category at the Santander Media Awards 2016. Email him at email@example.com
This column from Jeff was first published in November 2017. Since then I believe Interactive Investor have decided to take down their calculator while they create a new one.
My recommendation would be to take a look at the Money Adivce Service's calculator instead: https://www.moneyadviceservice.org.uk/en/tools/pension-calculator
Hope this helps.