Is my pension withdrawal plan sensible?
I’m 62 years old and have a SIPP worth roughly £200,000. I’ve already taken my 25% tax-free cash and have a relatively small defined benefit entitlement (paying about £4,000 a year).
I’ve paid off my mortgage and think I’ll need an income of around £15,000 a year from my SIPP to cover bills, a little holiday in the UK and a meal out every other week.
Does that seem a sensible amount to be withdrawing from my pension every year?
Tom Selby, AJ Bell Senior Analyst says:
Before you start taking a retirement income from your SIPP, make sure you don’t have any lost pensions from previous employers. A helpful resource is the Government’s Pension Tracing Service.
You should also check your state pension entitlement. The state pension age is currently 66 and for those entitled to the full flat-rate state pension, its current value is £175.20 a week (or £9,110.40 a year). This could provide a valuable top-up to your private pension income.
You need to have a 10-year National Insurance (NI) contribution record to qualify for the state pension and a 35-year contribution record to get the full amount.
You can check your state pension entitlement, when you will receive it and how to fill in any NI gaps here.
Next, think about your retirement goals and the income needed – something you have clearly done.
You could also use this opportunity to review your investments to make sure you are still happy with them. Given the focus in drawdown is on generating an income for most people, savers often pick either dividend-paying stocks or income funds as part of their retirement portfolio.
As always, the investment choices you make should be based on your risk appetite and long-term plans.
It is also important to consider the sustainability of your withdrawal strategy as you enter drawdown. This will be impacted by a variety of things including the performance of your investments, age, health and lifestyle.
Let’s take someone in your position with a £200,000 fund wanting to withdraw £15,000 each year. Inflation will reduce your spending power, so you’ll need to increase withdrawals to keep pace with rising prices.
We’ll assume withdrawals increase by 2% each year, in line with the Bank of England inflation target. If investment returns are 4% a year, the fund could run out after about 14 years.
Given a healthy 62-year-old woman has an average life expectancy of 25 years and a one in four chance of celebrating their 94th birthday, there is a fair chance you will run out of money early in retirement on your withdrawal plan.
You could review your spending and see if you can make any cutbacks to make your fund stretch a bit longer, and don’t forget to factor in any state pension you might receive into your spending plans.
Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.