×
First-time login tip: If you're a REBA Member, you'll need to reset your password the first time you login.
15 Sep 2022
by Stephen Lowe

How employees can achieve a comfortable retirement

Combinations of the state and private pensions, savings and equity release can make it possible for many people – but needs professional advice, which is where employers can help

Why a comfortable retirement doesn’t have to be out of reach.jpg 1

 

A couple hoping to enjoy a ‘comfortable retirement’ need a gross incomes of £55,840 (£49,700 after tax), according to the Retirement Living Standards, calculated by Loughborough University.

These figures increase for couples living in London.

A comfortable retirement doesn’t mean living in luxury. The weekly shop is at Sainsbury’s, holidaying is in Europe for three weeks each year and motorists will drive a five year old mid-range SUV like a Nissan Qashqai plus an older, smaller run around. This may constitute a ‘comfortable’ retirement, but it isn’t opulent.

How to meet the shortfall

So how achievable is this? The flat rate state pension currently provides a maximum of £9,628 per year or £19,256 for couples. That leaves a shortfall of £36,840.

For most people with a company pension, drawdown is becoming the product of choice. Drawdown sales are nearly three times the level of annuity sales.  The general accepted rule is that 4% is a safe withdrawal rate, but this ignores charges, and many commentators say that, in today’s low bond yield environment, 4% is just too high. Overall, a figure nearer 3% or lower might be more appropriate.

For the balance of our required income figure to come from defined contribution (DC) pensions, using a 3% withdrawal rate, the pension pot would need to be over £1.2m – more than most people’s savings. Fortunately, there are other sources of income and other options that can be looked at.

Annuities can help

As well as DC pensions, increasingly, people will have other savings and investments they can also draw an income from. And instead of using drawdown, a joint life, level annuity at 66 currently pays a little under £6,000 per £100,000 purchase price. This would reduce the DC fund needed to less than £700,000 (ignoring other sources of income). This doesn’t provide protection against inflation, but studies suggest that expenditure falls over the course of retirement, so a flat income may be a natural hedge against inflation.

Long-term care can derail any decline in expenditure, though most people won’t require residential care. In England, there is roughly a 35% likelihood of a 65-year-old female and 25% likelihood of a 65-year-old male having substantial care needs.

The popularity of drawdown suggests many people are unwilling to annuitise their retirement savings, but it needn’t be a binary decision. There is a mounting evidence that partial annuitisation within a drawdown portfolio can often achieve a better outcome: greater sustainability of income and higher death benefits long-term.

Releasing equity from the home

A further source of capital is to use the home to release money. This can be done either by downsizing or equity release. Increasingly, equity in the home is becoming an integral element in retirement planning. It can be used to simply boost income, as an alternative source of income in falling markets or as a backstop if funds run low.

While absolute levels of wealth inevitably play an important role in achieving a comfortable retirement, so too does the level of planning.

The fusion of pensions, state and private, with other savings and investments (including property equity) is a complex planning exercise that will challenge many. Guidance can help, but the solution will often be to get professional advice.

In partnership with HUB Financial Solutions

We are totally focussed on finding the right financial solutions for people approaching, or in, retirement. We don’t do anything else. Our purpose is to help people achieve a better later life.

Contact us today