Longer life expectancy, higher cost of living, and collapsing annuity rates mean careful planning is needed to make even substantial pension funds last.
A single retiree needs an average of Â£ 10,200 a year to lead a ‘minimum standard’ life in retirement, according to the Pensions and Lifetime Savings Association. To achieve a ‘moderate’ standard of living, a retiree will need on average Â£ 20,200 per year.
In reality, most savers are a long way from reaching this level of retirement income. According to the Profile Pensions advisory service, the average pension pot is Â£ 61,897 after a lifetime of savings.
Meanwhile, the average saver has a target pension pot of Â£ 355,000, according to Scottish Widows.
Even if this target level is reached, it requires careful planning to make it last two decades without much of it being eaten up by the IRS.
Annuity or levy – which is better?
Traditionally, those looking for a secure income in retirement would purchase an annuity, but these plans have become less popular. Rates have fallen to such a level that most buyers are unlikely to recoup their initial investment.
Meanwhile, the “drawdown”, taking money from the retirement pot, has grown in popularity. This option offers much more flexibility, but does not offer guaranteed income for life.
According to Aviva, Â£ 355,000 could buy a 65-year-old non-smoker and non-drinker an annuity of Â£ 16,489 a year.