I’m 50 and want to retire - can I live off my £100k ISA?

Q. I’m 50 and want to retire. My mortgage is paid off and I intend to live off my £100,000 stocks and shares ISA for a bridge to my private pensions worth £120,000. I only need £700 a month to do this. How achievable is this?

A. You’ll be able to take money from your private pensions in seven years’ time, when you reach the age of 57. At present savers are allowed to access pension savings once they turn 55 but this minimum age will rise by two years on 6 April 2028, when you will be 52.

Over the next seven years you want to live off the £100,000 in your stocks and shares ISA. Your £700-a-month income requirement equates to £8,400 a year and maintaining that annual rate of withdrawal for seven years would cost you £58,800 in total (7 x £8,400). So, at first glance your goal seems readily achievable and you’d even have £41,200 left in your ISA when you got access to the private pensions in seven years’ time. We have chosen to ignore any interest or investment gains to keep things simple and because, as we explain below, your investment time horizon is likely to be short.

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The other thing we’d be ignoring is inflation. In practice, your £8,400-a-year income requirement is certain to rise, perhaps substantially, over the next seven years. Prices were already rising more quickly in Britain than in comparable countries before the Iran conflict, which has only added to inflationary pressure as the price of oil tends to feed into almost everything. Even though there is now a ceasefire in the Middle East, many economists expect inflation of 3% or more over the next couple of years, and we cannot rule out a higher figure still.

There are numerous unknowns in any projection so let’s just use that 3% annual inflation figure as a simple starting point. It means that over the following years your annual income needs would rise from the initial £8,400 in year 1 to £8,652 (year 2), £8,912 (year 3), £9,179 (year 4), £9,454 (year 5), £9,738 (year 6) and £10,030 (year 7). Your total ISA withdrawals over that period would be £64,365, leaving £35,635 in the pot at the end, if we again ignore interest or investment gains.

You say your £100,000 is in a stocks and shares ISA but we don’t know how it’s invested (it is of course possible to hold lower-risk assets such as short-term bonds and even cash funds in a stocks and shares ISA).

However, if you do have riskier assets such as shares in the ISA it’s worth considering whether you want to move gradually to less risky assets as time passes. For example, you could move enough into bonds and cash to cover the first five years’ withdrawals (five years is considered the minimum time horizon for holding shares) and do the same for the remaining two years’ withdrawals over the next year or two. That way you should have enough in cash to cover your needs for the entire period irrespective of what the stock market does.

When you reach the age of 57 and can take money from your private pensions you’ll be 10 years away from the state pension age and will need to rely on those pensions, plus any money left in your ISA, to fund your needs. If we assume that your income requirement stays the same, as long as it’s increased by 3% for inflation each year, the total withdrawals over the 10 years come to £118,433. That sum is just a whisker less than the £120,000 you currently have in your private pensions. However, you should also have money left in your ISA (£35,635 before interest or investment gains) plus any interest or investment gains from the pension money, both before and after you start to withdraw from it. Again, when it comes to how the pension money is invested, it would be prudent to progressively switch sums earmarked for each year’s withdrawals away from the stock market and into cash or bonds five years before they are needed.

Withdrawals from pensions, unlike from ISAs, are in principle taxable, although your own withdrawals should be less than the annual tax-free personal allowance, currently £12,570.

The current state pension is £1,046 a month and, at least if the current ‘triple lock’ is maintained, will rise each year at least in line with inflation and possibly by more. It should therefore comfortably exceed your £700-a-month requirement even when inflation is taken into account. State pension income also becomes taxable once it exceeds the personal allowance.

Please note that the above is general guidance on the basis of your figures and current legislation and does not constitute financial advice, which is available from registered advisers from Fidelity or a firm of your choice.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in a SIPP or ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a SIPP will not normally be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.