Fairly obviously, the era of final salary pension schemes has gone for good. But what is much less obvious is how individuals should now go about replacing that assurance of a reliable and adequate post-retirement income.
As a new member of the team here at Monevator, it’s my job to help you figure out your own approach to this seismic change in our collective prospects for retirement.
And precisely who am I? Am I — gasp — a pensions pundit, fresh from yet another soundbite in the Daily Telegraph? A guilty-feeling IFA, perhaps? Or an employee of a pension firm, forced to moonlight as a blogger as would-be retirees stay away from annuities in droves?
Er, no. I’m none of those things. I’m an investor, as it happens, and probably little different from you.
But — and I recognize that this may be my most relevant qualification for the role — this month I turn 60.
Gulp.
So I have a keen interest in finding not just easy answers to the retirement conundrum that faces us all, but the best answers. Answers of direct relevance to your circumstances, as well as mine.
Together, we’re going to navigate this brave new world of deaccumulation, SIPPS, annuities, flexible drawdown, and all the rest of it.
A different landscape
When many of us entered the workforce, final salary schemes were the norm. You’d work until you were 65 – 60 for women — and then retire on a pension that was calculated as a fraction of your salaried pay.
No longer. The vast majority of private sector employers have ditched their final salary schemes, transferring employees to ‘money purchase’ schemes, which leaves employees — and not the employer — carrying the risk of any investment downside.
Retirement ages, meanwhile, have been jacked sharply upwards.
My own state pensionable age is now 66, not 65. My wife thought she was going to retire at 60; now, as a public sector employee, she’s expected to work to 62.
And a close friend in her late 40s — also a public sector employee — now finds herself due to retire at 67, thanks to the way that public sector pensions calculate pensionable service.
More miserable years
Plus, as a nation, we’re also living longer. And those increased retirement ages are partly a response to that, of course.
But more particularly, our increased average longevity is regularly cited as one of the reasons behind tumbling annuity rates — which is another aspect of the changing retirement landscape, of course.
It’s the scale of that increase in longevity that is frightening. According to Office for National Statistics population projections and life expectancy estimates, nearly one in five of us will live to see our 100th birthday.
Good news, surely?
Well, not if you’ve cocked-up your retirement strategy, that’s for sure. Someone I know, in their late fifties, has this week just stuffed another £40,000 in their pension. Just as they did last year, and the year before.
Someone else I know, of a similar age, perhaps has total pension savings of that same amount.
Yes — £40,000.
A retirement composed of 30 or so years of baked beans and homebrew? No thanks.
You’re on your own
What to do? Roll it all together, and the picture that emerges isn’t comforting. It certainly isn’t a view of retirement that your father would have recognised.
Simply put, compared to our parents’ generation, each of us can expect to:
- Retire later
- Rely on our own savings for a greater part of our post-retirement income
- Require those savings to support us for longer
It’s the last of those that is giving me pause for thought. Because there’s a very real risk that my retirement savings will have to sustain me 25, 30, or even 35 years.
Which, put another way, is scarily close to the timescale over which the bulk of those savings were built up.
I certainly don’t want to join the beans and homebrew brigade.
Running on empty
There are no silver bullets. Despite the hype since the Budget, I don’t think that the changes to pensions and annuities announced on March 19th particularly help.
Giving pensioners more freedom to use their pension savings as they like — instead of being made to buy an annuity — doesn’t magically increase the size of a pension pot, or make it stretch further.
Indeed, by increasing the drawdown limit from 120% of the equivalent annuity income to 150% of the equivalent annuity income, there’s a real danger that some people’s pension savings will expire before they do. Especially for people in their 90s, or reaching 100 — the very point they can ill-afford a cut in income.
So as retirement landscapes go, it’s not a pretty picture.
Nevertheless, in the months ahead, I’m going to begin weaving my way through it. With you, Dear Monevator Reader, as a traveling companion.
Let’s have fun — and hopefully, retire richer.
The Greybeard
Comments on this entry are closed.
Welcome Greybeard
As retirees we have for some years faced the problem of how to generate income from our portfolio.
All Asset Classes, Stocks/Bonds/Cash/Rental Real Estate, seem now to have been bid up to unreasonably high levels by too much loose money chasing a limited supply of assets, so it is not sensible to expect much in the way of capital gains from here.
While US, and other overseas markets seem expensive, the FTSE100 still throws off a respectable yield, but nowhere near 2009 and will almost certainly fall when other markets falter.
As for fixed income, trying to beat inflation is a nightmare. The only reasonable inflation linked yields seem to be in infrastructure as a quasi IL Bond, trading well above NAV and where surely there must be a downside, maybe political risk?
Look forward to your addressing some of these and other issues.
All Best
Very much looking forward to following along for the journey and identifying the hazards so we can take corrective action to avoid.
Whey-hey, no silly footnotes! Keep it up.
And BTW, I like baked beans and, living below my means, have drunk homebrew for 30+ years.
Always good to hear others’ experience — as I say, keep it up.
[And no silly footnotes; good man!]
welcome greybeard! its always good to see things from another’s perspective 🙂
Grand
ill be glued to what you have to say!
Looking forward to reading your posts, Greybeard.
But what’s wrong with homebrew? I’ve just taken up homebrewing as a new hobby!
Welcome Greybeard – mines a goatie and very grey!
I’m 55 with a small pension pot (growing slowly).
I have recently been adding to it furiously and taking out ISA’s like they are going out of fashion.
Fear is my greatest ally at the moment but at least I am trying to do something about it. I hate baked beans, always have, always will so there is no way I am going down that road (marmite on toast preferred).
Currently looking at moving my pension into a SIPP – (already opened with some funds) and looking at portfolio using Investment Trusts /ETF’s / Funds. At present Bonds covered by the Vanguard ETF’s:
Vanguard U.K. Inflation-Linked Gilt Index Fund
Vanguard Global Bond Index Fund
Long term trying to achieve 3% above inflation p.a.
Have worked out spreadsheet up to age of 85 (proposed retirement at 60) that allows me to live off 20K per annum (I know it isn’t much but I can live on it) – it also allows for inflation set at varying rates over each 5yr period. At that point (85) my pot is 50% down living at that level!!
So if I can make 100 I’ll have nothing – the thing is, will I know anything about it by then!
Back to the drawing board!!
Welcome – and it’ll be an interesting ride. Oh and I’m with you on the homebrew –
> But what’s wrong with homebrew?
as I get older the ability to avoid a skull-cracker by processing the bad stuff falls. I’ve dodged that by going up the quality axis 😉
Looking forward to it as I accelerate towards 50 and kids university fee’s are weighing me down like an anchor.
I was thinking of living off dividends generated by my HYP/ETFs, stuffed in my ISA and then using my SIPP to generate fixed income (coupons) to balance it out.
Will I get taxed on the coupons in my SIPP if I start to access them after 55 ?
I’m just waiting for the autumn statement to confirm the new draw-down small-details before opening & stuffing a SIPP.
I had planned to retire at 53, but the minimum pension age change a few years ago buggered that plan, so since I’m stuck for another two years longer than planned (as too much of my savings are in pensions) I might as well maximise the opportunities given in the last budget. Therefore I very much looking forward to hearing your views on various pre-draw-down strategies, etc.
glad to hear that there’s some support for homebrew, but none for baked beans. i think ppl have their priorities right here …
Icky, if you’ve halved your pot at age 85, that might be a good time to buy an index-linked annuity with it. annuity rates may well be high enough at that age to give you sufficient income, even on the reduced pot size. OTOH, if you’d spent 90% of the pot, there probably wouldn’t be enough. the difficulty is that projections of how much you’ll have left tend to have a wide margin of error. you can reduce the margin of error by putting more in less risky assets, but that also reduces your expected returns.
Ric, do you not even have enough in accessible capital to retire at 53 and just spend down accessible capital for the next 2 years? that can be sustainable, if meanwhile your pension is growing to compensate.
Greybeard, have you considered selling that antique armour and putting the proceeds in tracker funds?
Welcome Greybeard!
As someone at 40 who has an illness that is likely to affect me in later life I look forward to your posts. I’m a late starter to the investing scene and a big believer in passive investing since discovering this site (and others) at 38! I would like to retire at 55 if at all possible so it will be interesting to hear your experiences as you navigate this nightmare of pension and retirement strategy!
Welcome!
As a Brit, I suppose, you can write about anything but football and cricket.
Looking forward to your contributions.
I’ve estimated I might retire in about 10 years something like this:
Get £960k in today’s money split 640k in pension and 320k outside. Mode 25% lump sum to make 2 piles of 480k. Draw £10k a year from each (keeping to the income tax personal allowance) to get £20k net. At a withdrawal rate of 2.1% that should be sustainable long-term.
Currently have about £400k pension and about £150k outside. Getting to my target figure will probably take me past age 55 or I think I might get away with retirement at 55 with less saved.
It could still be harmed by abolition of the 25% pension lump sum. And my protection against income tax doesn’t help if VAT goes up.
I am in a similar position to pack drill not found, but the plan is being put under pressure by a job move & three young kids. I am planning for a SWR of 4%.
Currently plugging away £40k a year into a combo of my employers pension scheme and my SIPP, gross, with anything extra into ISAs.
A downsize should release £100k net once a couple of the nippers have flown the coup
Splendid! I am also a greybeard planning a 3-year run up to final exit at 55-and-a-bit so this could be a very interesting series of articles.
Thanks for all the comments and best wishes everyone. The Greybeard has messaged me to say unfortunately is unable to reply right now — he’s doubtless having one of those “life begins at 60” moments I keep reading about — but he appreciates the welcome and hopes to reply soon!
Welcome Greybeard. I am retired and looking forward to your post retirement investment insights. I think key question for most retirees is will I be able to afford to live on what I have in retirement, the answer is always yes.
It is what it is, and unless you have some unknown legacy or rich benefactor you will have to live on what you have got.
The key questions for me me in retirement is how to generate income, how to protect against inflation and how long will my money last with a reasonable drawdown.
So a portfolio for a retiree will depend upon whether the investments are essential to supporting a desired lifestyle or just something to spend on luxuries and leave for the kids.
I went to an IFA in 2006 soon after I retired to get advice on how to consolidate my pension lump sum and a rag bag of ISA’s and investments. I just took his advice and learn’t my lesson. We parted Company in 2011 after I found this site so I hope you can keep up the good work from a retiree’s perspective. I now look after my own portfolio of passive investments and stakeholder pension.
Here are a couple of links to sites that might help with people making the first step to manage their own portfolio, as I did.
What is my tolerance to risk?
https://www.riskprofiling.com
and how long will my money last?
http://www.firecalc.com
Looking forward to seeing future topics
“My wife thought she was going to retire at 60”: she can’t have thought it for the last 15 years or so, surely?
Hi Greybeard – as someone who just crashed, with a shuddering jolt, into 60, I look forward to your posts.
It seems to me that many of the people writing here are either much younger (and have time to save), or much smarter (and realised that the pension savings might not be enough). I’m not hurting as I still have a defined benefit pension (that last generation thing), but I am working on a plan to top it up to finance the lifestyle I aspire to in retirement.
Some thinking on those last critical years before retirement would be very interesting
Hi everyone,
Thanks for the friendly welcome. Sorry for the delay in replying, but I’ve been away on business.
I hope, over the next few months, to start addressing quite a few of the points raised in your comments, although it’s clear that we’re all approaching retirement from some fascinatingly different perspectives.
Be that as it may, it’s clear that a common goal unites us all: enjoying a comfortable retirement, while paying as little in fees as possible to the financial services industry.
And by the way, on the subject of “comfortable”, I’m not above enjoying making (and drinking!) the occasional batch of homebrew. So don’t take my homebrew comments the wrong way. It’s just that I don’t want my alcohol aspirations — and budget — constrained to homebrew, that’s all.
Finally, I’m still deciding what topic my next post will cover. But it’s good to know, from the comments here, that I’m thinking along the right lines.
The Greybeard
next topic?
how about ideas for a passive income draw down portfolio?