Make it last
Have a plan in place when accessing your pension.
Time to reap your rewards
You've spent a lifetime saving for your dream retirement. Don't fall at the last hurdle.
Some people like to get a guaranteed income for life by buying an annuity. Some people prefer to take money from their retirement savings when they need it (also known as drawdown). And some people do a mix of the two.
In this section, we're going to focus on drawdown and mapping out a flexible income plan - whether that's as lump sums or a regular income, so that your pension pot lasts as long as you do.
Make your pension last
The theory
Before you know what kind of income your pension can give you, you'll need to think about how long you need it to last. And as we're all living longer, it's not easy to predict how long that could be.
How it works in practice
The chart looks at the life expectancy of people already aged 65. It shows that:
- Women have a one-in-four chance of living until the age of 95 and a one-in-ten chance of living until 98.
- Men have a one-in-four chance of living until they are 92 and a one-in-ten chance of living until they are 96.
It means lots of us will enjoy retirements that last 30 years or more.
Base your plans on sensible assumptions of life expectancy and factor in other sources of income that help meet your living costs at different stages.
Work out how much money you need to enjoy your retirement
The theory
When calculating the income you can take from your pension, think how much you can take each year so that there's enough left in the pot to last your lifetime. In reality, this will depend on your investment returns - which are uncertain - so it makes sense to stay flexible and be prepared to change the income you take as time goes on.
The key is to avoid taking too much so that you run out of money early.
How it works in practice
The more you take out, the greater the risk is that your pension will run out too soon - even when the rest of your money remains invested. Many experts believe that 4% withdrawals allow you to take a steady income, while leaving enough in the pot to hopefully continue to grow, so that it will last as long as needed.
See how long your retirement income might last with our pension drawdown calculator.
Understand what sequencing risk is
The theory
While you've been saving for your pension, you've probably not worried too much that your investment returns vary from year to year. After all, time was on your side. But once you're ready to retire, the order that your returns happen is more important, as it could lead to very different outcomes for you and your pension. This is sometimes known as 'sequencing risk'.
If you sell your investments when the price is low, you'll have to sell more of them to get the income you want (leaving less of your pot invested). On the other hand, when the price is high, you'll sell less to get the same amount of money, which leaves more of your money invested - and gives your investments a greater chance of growing in your retirement.
How it works in practice
Let's say that over 10 years, your portfolio will earn an average annual return of 5%. Some years you'll get higher returns. Some years they'll be lower (perhaps even a loss).
If you start to take an income when your investments are performing well, you won't have to sell as many investments to get the income you need. This will give you a 'good start' to drawing an income and you can see this on the graph in blue. Even though your returns fall in later years, you're still left with around £126,000 in your pension pot.
If, on the other hand, you start to draw down when your investments aren't doing very well, you have to sell more investments to get the income you need. This is the 'bad start' shown by the orange line. By the time ten years have passed, your pot is much smaller than if you'd enjoyed the 'good start'.
This example is for illustrative purposes only. Investment values can fall as well as rise and so outcomes can be different depending on market conditions. Charges would also apply and reduce any returns.
Get smart about sequencing risk
Prepare for the worst, hope for the best. That pretty much sums up how best to approach sequencing risk. You can't do anything about market falls. But if they come along when you start to take an income, it can really affect your pension pot.
Here are some things to think about when taking an income from your pension pot.
It's worth having a cash safety net for when markets are falling so that you can take an income from it. You can then top up from your investments when - or if - they recover. This may not totally protect you from losses, but it can help lessen the impact of a falling market on your pension.
If the value of your investments falls, see if you can survive off the income produced naturally from your investments (such as your dividends or bond interest). It might not be as much as you'd like, but if you budget a little in the short term it might benefit you in the long run.
If the thought of riding out the highs and lows of the markets with your pension doesn't sit comfortably, you might want to think about buying an annuity. An annuity pays you a guaranteed income for the rest of your life. Like any income you draw from your pension it's potentially taxable. You don't have to put all your savings into an annuity. You could invest some money and buy an annuity with the rest to cover your day-to-day costs. To find out if an annuity is right for you, please see our Annuities page.
And finally... if you want your pension pot to last the distance, try and be as flexible as you can.
What next?
Explore pension transfers
Retirement planning
Speak to a retirement specialist
Important information - Investment values (and income from investments) can go down as well as up, so you may get back less than you invest. SIPP eligibility and tax treatment depends on individual circumstances and tax rules may change. You cannot normally access money in a pension until age 55 (57 from 2028). This is not a personal recommendation for a product, service or action. If you are unsure about the suitability of pension investments or transfers, or action you need to take, we strongly recommend seeking advice from Fidelity's advisers or another authorised financial adviser.
