Recent research by the FCA (Financial Conduct Authority) suggests that most retirees are withdrawing an unsustainable amount from their pension plans which might contribute to lowering their post-retirement life standards. If they continue the same way, some retirees may also run out of most of their retirement money before retirement.
The UK government introduced a flexible Acessdown in 2015, a flexible pension drawdown plan that lets employees access their pension savings in a more relaxed manner whenever they need and reinvest the remaining funds required for pensions to guarantee a sustainable income instead. This has provided retirees with more ways to access their pension savings before retirement.
This product also helps retirees increase or decrease the plan’s income per their needs. When investment returns are reinvested, they are able to make more money on the invested money, which can help them accumulate for their post-retirement life.
However, with the speed at which retirees these days are withdrawing money from their pension schemes and not filling it back again, a massive chunk of retirees might run out of their retirement money well before they retire.
How much should you actually withdraw from your pension scheme?
Ideally, nothing. Your pension scheme exists for a purpose, and that purpose takes place after you retire. It is not recommended to touch your pension savings before you are actually retiring so that you can maintain a decent standard of living even in your post-work life. However, the same research by the Financial Conduct Authority found that most retirees have been withdrawing as much as 8% every year from their pension accounts.
If retirees have multiple pension accounts that they contribute to, this sum is not much of an issue. However, if a retiree-only has a single pension scheme, if they are withdrawing such an amount every year, they might be at threat of losing a good amount of money before they actually have to retire. This withdrawal of 8% then proves to be unsustainable in the long term. Hence, pensions guarantee a sustainable income if you treat those schemes as savings strictly for your post-retirement life.
Even if you have to withdraw some amount from the scheme every year, the rule of withdrawing 4% is mainly followed. Withdrawing a maximum of 4% from your pension plan seems sustainable but should not continue for an extended period of time either.
How can you calculate a pension withdrawal amount that is sustainable?
- Understand how long your pension plan will need to provide you with an income. This depends on the age you retire. If you retire early, for example, in your 40s or 50s, you need to have more amount in your pension scheme and hence need to withdraw less every year. However, if you plan to retire at the official age, you need comparatively less and can focus on withdrawing a sustainable 4%. You can also calculate tour life expectancy and dependencies (if any) to understand how much your pension needs to provide. If you underestimate this tenure, you might be in a complex financial situation later.
- Rethink how you are investing your pension. Some plans keep you invested forever, whereas some plans expire on a date. The longer you have opted for a plan, the better it is as you get more time in hand to put in more money to the account.
- Check how many reliable sources of primary and secondary income you have. At this point, you can consider if you have some rental, salaried, and passive income. Understand how solid these areas are and if they are all permeant, reliable and regular.
- Lastly, consider if there are any assets that you can use to create more income. This will help you analyse a backup plan for the time if your retirement pension does not seem enough for your post-retirement life. Savings, property, investment and more can add addition to the pension scheme and enable you to withdraw more even if you need a sustainable income.
Final words
A pension plan provides an individual with financial security in the future, and that is why it is extremely important to maintain the same. If you want financial freedom after you stop working, you need to ensure that you do not withdraw much from your pension plan account in order to have a sustainable income later. Careful financial planning plays a role in building a solid action plan towards contributing to the pension plan and withdrawing from the same. Always take into consideration a financial expert’s advice about what your existing options are, how can today’s actions impact the future and if you have enough to spend after your retirement.
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