If you’re planning your retirement and aren’t sure where to start, you may have come across “rules” to follow. While these could provide a useful baseline, some of them are outdated and, as they don’t consider your circumstances, may not be right for you.
Here are three outdated pension rules you may have come across, and why they may no longer be suitable for modern retirees.
1. Give up work on a set retirement date
Retirement lifestyles have changed.
In the past, it was commonplace to reach your retirement date and give up work completely. For many reasons, modern retirees are embracing a more flexible approach.
According to a report from abrdn, two-thirds of people who plan to retire in 2022 intend to continue working in some way. Having a transitional phase comes in many forms, from working in a part-time role to volunteering or setting up a business.
One of the key benefits of working in retirement is that it could boost your income while striking the work-life balance you want. You may want to continue working for other reasons, whether you want some structure to your routine or you enjoy the social aspect of work.
As you near your retirement date, you should think about the kind of lifestyle you’d like and how it might change over the years.
If you intend to work past the traditional retirement date, you may need to consider how it will affect your tax liability and so on. That’s why a financial plan tailored to your choices can help you understand how to get the most out of your income throughout your life.
2. Withdraw 4% of your pension for a sustainable income
If you have a defined contribution (DC) pension, one of the retirement challenges you may face is deciding how to access your pension. For example, you can choose to take a flexible income, although it will be your responsibility to ensure it lasts for the rest of your life.
Withdraw too much and you could run out of money or need to change your lifestyle later in life. Alternatively, being too frugal could mean you miss out on things you want to experience. So, striking the right balance is important.
You may have heard of the 4% rule, where you withdraw 4% of your pension each year to achieve a sustainable income.
However, this rule may not suit modern retirees for two key reasons.
First, longer life expectancy means many people are spending longer in retirement and so pensions will need to stretch further.
Second, investment returns will affect the value of your pension. A period of lower returns could mean you need to reduce your income.
Data from the Financial Conduct Authority indicates that some retirees could run out of money by taking unsustainable sums from their pensions. Some are taking more than 8% of their pension in a year. It’s crucial you know how withdrawals will affect your long-term security.
If you prefer, you can purchase an annuity with a DC pension. This could provide you with a guaranteed income for the rest of your life. Please contact us to discuss the pros and cons of the various pension options.
3. Calculating how much to contribute to your pension
Knowing how much you need to contribute to a pension to achieve your retirement goals can be difficult.
A common rule is to divide the age you start saving for retirement by two and deposit this percentage of your income. So, if you start adding to a pension when you’re 20, you’d need to add 10% of your income throughout your career. Put off building up your pension until you are 30, and it rises to 15%.
This rule recognises the powerful effects of compounding when you invest over the long term. However, it doesn’t take into account your retirement expectations. How much you need to save for your retirement will depend on the lifestyle you want to lead.
Once again, this rule could mean you don’t save enough once you consider how long your retirement could be.
Do away with “rules” and create a retirement plan that suits you
While these rules can be useful for getting a general idea of how to retire, they don’t consider your goals and circumstances. A financial plan that’s made just for you can help ensure you’re on track for the retirement you want to enjoy.
Please contact us to arrange a meeting to discuss your retirement plans.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.