Have you ever thought about how long your pension might last? I’m not talking about the state pension we’re all entitled to, eventually, but rather the savings you’ve built over the years to supplement this basic income, to fund your retirement in the way you want to live it.
I suspect many of you have – especially if you’re already retired or close to stopping work. I imagine it’s a question that’s also crossed the minds of people in their 50s, and maybe even in their 40s, as they mull whether to take advantage of pension freedoms by dipping into their pension when they turn 55, or not.
The answer isn’t a straightforward one because how long your pension savings last depends on your goals and circumstances, as well as your actions in terms of how much you save and how much you spend in retirement. It’s why in the coming months we intend to explore this theme in more detail.
To whet your appetites, though, what if I told you that drawing down your pension with a low-cost provider could extend the life of your pension by more than a third? No brainer, right?
Do the maths
Here’s some maths to back it up. Let’s assume you start with a pension pot of £350,000 and decide to withdraw £20,000 a year to fund your upkeep, earning an average annual return (before costs) of 5% on the invested money you leave behind. On this basis, we calculate that your pension pot will last you just over 33 years if held with us and invested in one of our LifeStrategy funds. This is because the annual cost of our self-invested personal pension (SIPP) is 0.15% a year (capped at £375) and the annual Ongoing Charges Figure on our LifeStrategy fund is 0.22%, so your theoretical average annual investment return (this time after costs) won’t be lower than 4.63%.
Now compare that with the rate at which your pension would shrink if your investment costs totalled 1.5% or, even 2%, per year – which is very possible if you look at what some other SIPP providers, discretionary wealth managers and fund products charge. As the chart below shows, by cutting your prospective return back to 3.5% or 3%, respectively, it would mean your pension pot of £350,000 lasting just over 24 years.
How a pension might shrink under different hypothetical scenarios
Source: Vanguard calculations. Notes: The chart assumes gross average annual investment return of 5%. Annual Vanguard costs here comprise a 0.15% SIPP charge (capped at £375 annually) and 0.22% LifeStrategy fund fees.
Now some of you may be happy to take your chances, depending on when you intend to retire and your personal circumstances. After all, average life expectancy in the UK for people of all ages is currently 79.4 years for men and 83.4 years for women.
However, it’s worth noting that these headline averages underestimate what’s likely to happen to younger generations, given improved healthcare, healthier lifestyles, and improved working conditions. The government’s own calculations shows that a woman now aged 53 can, on average, expect to live to 87. She also has a one-in-four chance of reaching 931.
Research also shows there is a one-in-two chance that one or other of a couple now retiring will still be alive at age 95. And it rises to 60% for people born in 19702.
In any case, this is your money; you’ve worked for it all your life. So why give it to someone else, let alone a pension provider? Wouldn’t you rather spend more of it on yourself or your children, whether it’s to help them while you’re still alive, so you can see and enjoy the benefit, or long after you’ve gone? After all, as our hypothetical example above shows, you could be getting up to £180,000 more out of your Vanguard pension compared with a more expensive SIPP-funds combo3.
That’s a lot of extra money – imagine what you could do with it!
1 The Office National Statistics has a life expectancy calculator on its website that allows you to calculate how long we can all, broadly, expect to live for. Tap in your own details and see what it says here:
2 Cox, P., Helping consumers and providers manage defined contribution (DC) wealth in retirement, Birmingham Business School, February 2015.
3 This is based on the assumption that you’re able to extract about £660,000 in total (33 full years x £20,000) from your pension by paying just 0.37% annually for your SIPP and fund investments, compared with about £480,000 if you paid 2% (24 full years x £20,000). In both examples we assumed an average annual investment return of 5%.
Investment risk information:
Eligibility to invest in a Vanguard Personal Pension depends on your individual circumstances. Please be aware that pension and tax rules may change in the future and the value of investments can go down as well as up, so you might get back less than you invested. You cannot usually access your pension savings or make any withdrawals until the age of 55.
If you are not sure of the suitability or appropriateness of any investment, product or service you should consult an authorised financial adviser. Please note this may incur a charge.
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