How long will my money last?
Following the last Budget the Government’s proposal to allow unlimited access to pension fund cash has attracted huge amounts of editorial comment in the press.
In particular there is comment that the average person does not realise how much money they need to give them an income in retirement. It is, after all, quite a difficult calculation and involves guessing things like investment return, inflation and how long you will live. Surveys have repeatedly shown that people underestimate capital needed in retirement by 2 to 3 times.
So the concern is that people may not save enough towards retirement or that they may access and spend their pension funds too quickly.
This month I have produced the grid shown below, to give an indication of the fund you would need in retirement to provide a given income. There is, of course, danger in producing such a grid as it makes lots of assumptions and therefore may be inaccurate for many. Nonetheless, perhaps a good place to start to give the general magnitude of fund needed.
Assume, for example, you are 20 years away from retirement (age 66) and want an income before tax of £30,000 in today’s terms. The fund quoted in the grid of £964,733 is the fund size needed to give you an income of £30,000 a year that increases by 2.5% per annum. So if you think you need an income in today’s terms of £30,000 a year, when you reach retirement at age 66 you will actually need £49,158 a year because of inflation. The money doesn’t have to be a pension fund. It could include savings, inheritances or other capital. It’s the fund needed to sustain the required income until age 90. Living longer may mean that you run out of money.
Please note that figures do not include the State Pension and independent financial advice should always be sought before any actions are taken.
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Mark Penston BSc, AFPS, MEWI (Partner) – Chartered Financial Planner
Specialist in investment, pensions and financial aspects of divorce.
Mark is a Chartered Financial Planner and has spent over 20 years assisting clients with their financial planning needs. As well as his investment work with clients Mark works closely with lawyers and their divorce clients who need assistance on how pensions and other assets should be divided on divorce.