How Much Can I Take From My Pension Fund?
How much can I take from my pension fund each year and be sure I do not run out of money in retirement is a common question we are asked. With the introduction of Flexi-Access drawdown, increases in life expectancy and ongoing uncertainty in financial markets it is no surprise some are concerned the long established ‘rules of thumb’ are no longer valid.
You may wish to take a tax-free lump sum from your pension fund. Perhaps you are planning to take more in the early years of retirement and assuming you will need less in later life. A wide variety of personal circumstances can make the safe withdrawal rate (SWR) much more difficult to calculate than was once the case.
The ‘safe withdrawal rate’ is the safe level of income that can be withdrawn from a pension fund over a 30 year period. Making withdrawals from a pension fund that match the SWR should ensure you continue to receive an income from your pension in line with inflation, without running out of capital.
The long established ‘rule of thumb’ (SWR) was set at 4% by USA based financial planner William Bengen over 20 years ago. So, as an example, if you have a total pension fund at a given point of £200,000 then, in theory, you may withdraw £8,000 over a 12 month period. Don’t forget this will be in addition to whatever state pension entitlement you have.
The 4% SWR has been widely discussed and criticised over the years. A report by Morningstar in early 2016 suggested that the SWR for the UK should not be 4% but actually 2.5%. Others suggest that the SWR is 5%.
The SWR should only be used as a starting point and no more than a guide. It is more important to consider your personal circumstances including:
- Attitude to risk.
- Required income guarantees (if any).
- Investment strategy, including diversification.
- Any desire to leave any remaining pension fund to beneficiaries on your death.
- Your planned withdrawal profile.
- The impact of fees and taxes.
- Any planned changes in spending habits over time.
- Any planning for long term care in later life.
If you choose an Annuity at retirement many of the above factors are not an issue but if you decide to access your income flexibly using Flexi-Access drawdown they can be a concern.
The actual safe withdrawal rate is entirely dependent on personal circumstances. Ideally, you should get a feel for your withdrawal rate as part of a retirement planning exercise with a financial adviser. They will have the tools to run through various scenarios with you.
In drawdown, there is one great unknown – how long you may live. Latest statistics show a married couple could both reasonably expected to live for 22 years from the traditional retirement age of 65.
For a quick (and rough) assessment there are various online calculators available including our own App (Android). Unfortunately, the quality of the output very much depends on the assumptions made when building the calculator so they should not be relied upon.
Brexit, escalation of conflicts in the Middle East, the ongoing trade dispute between the USA and China all impact on the financial markets. The SWR depends to an extent on if the markets are buoyant or down. A range of economic and political factors are affecting market performance today. Who knows what the issues will be next year never mind ten to twenty years in the future.
Should you want to discuss your retirement plans then complete the form below and we will call you back to arrange a convenient time to discuss. If you have any questions simply give us a call or open a Chat. If you would like to read more try our retirement planning guide.
This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. The past is not a guide to future performance. The value of investments can go down as well as up and you may not get back the full amount you invested. Tax and financial regulations can change. Any figures quoted above are correct at the date of publication.