Anonymous

My wife and I have just turned 65 and are about to start taking an income from our pensions. I have a private pot worth just over £300,000 and we also have a bit of state pension each (worth about £10,000 a year combined). We have paid off our mortgage and need a bit of help managing our withdrawals as I know taking too much too fast could be a problem. Ideally we’d like to have £25,000 a year between us to live on.

Tom says:

There are two broad retirement income avenues you could go down – handing your private pension pot to an insurance company in exchange for an annuity providing a guaranteed income for the rest of your life, or keeping your money invested and drawing flexible income and staying invested.

At today’s rates a healthy 65-year-old with a £300,000 fund could buy a single-life, inflation-protected annuity worth about £850 a month, or just over £10,000 a year*. If you took your 25% tax-free cash (£75,000) the remaining pot (£225,000) would buy a similar income worth about £7,500 a year.

If you wanted to add 50% spouse’s protection – meaning your partner would get 50% of the annuity income if you died first – the same £300,000 buys you an income worth £8,363 a year (or £6,272 if you took your 25% tax-free cash first).

In short you’ll fall short of your annual income target in all scenarios. However, because an annuity is guaranteed you won’t need to worry about running out of money if you live to a ripe old age.

Alternatively, you could keep your fund invested and draw an income through drawdown. This route will require you to manage both your investments and withdrawal strategy, taking into account things like rising prices (‘inflation risk’) and how long you might live for (‘longevity risk’).

If we assume you achieve investment returns after charges of 5% and withdraw £15,000 a year, rising in line with 2% inflation, your fund should last until your 95th birthday.

This is only a guide and your actual investment returns will have a significant impact on the sustainability of your strategy – so you might need to reduce your income if markets turn sour.

You should also bear in mind that while average male life expectancy at 65 stands at 86, you will have about a one in 10 chance of reaching 97 and a 4.7% chance of celebrating your 100th birthday. For a female, the chances at age 65 of reaching 100 are 7.4%**.

Another option is to take ad-hoc lump sums from your pot, with 25% of each withdrawal tax-free. For many, a mix-and-match approach – combining some guaranteed income through an annuity with some flexibility through drawdown – will provide the right balance.

*Annuity quotes estimated on 15 March 2019 using the Money Advice Service annuity comparison tool

**Based on Office for National Statistics projections (May 2018)

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