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Pretty piss awful

How to save a £1 million pension
A seven-figure pot would give you an income of about £40,000 a year. Lily Russell-Jones finds out how to hit the target

4%? On a pension?


Annuity rates are about 6.5% aren’t they?

4% is assuming you’re not eating your capital. Hell, make the assumption you’ll live 20 years (to 85) and you can eat £50k of capital a year entirely ignoring income from the pot.

I know we’ve pensions experts around here. But 4% looks like an insane assumption.

15 thoughts on “Pretty piss awful”

  1. Rates are between 6 and 7 percent depending on who you go to. You can get >4% if you buy Gilts yourself and keep the capital (with inflation risk of course). Demand for retail annuities is significantly higher than anytime since pension freedoms day under Osborne.

    Long rates are substantially lower than short rates but spot 15y Gilts are 4.7% on Fri so I think my statement above is comfortably correct.

  2. 4, 5, 6, 7%?

    Not when as I would expect under either Labour or the fake Tories a private pension is in future required to be invested in something “productive” like Murphy’s 1% Green Bonds. Of course not applicable for civil servant etc retirees who have been delivering “essential public services” so efficiently.

  3. American friends have been telling me for some time that they expect the government will attempt to expropriate 401(k)’s in return for the promise of an “equitable” rate of return.

  4. 4% withdrawal rates were an article of faith on the early FIRE websites (Mr Money Mustache, Extreme Early Retirement, etc), with the promise that if you save 25 years worth of expenses you could retire at any age. Part of the appeal being that if you could not increase your earnings then you could hammer your living expenses and pretend to be financially independent.
    Maybe Lily has the number stuck in her head?

  5. The 4% rule includes the impact of inflation. £40,000 today is a good retirement; but £40,000 two decades from now might not be.

  6. you could hammer your living expenses and pretend to be financially independent

    A lot of the ‘I retired 39’ lot do seem to be living in random developing nations on basic rations.

  7. The 4% figure has always been a rough guide that assumed that you intend to preserve your capital dying with about as much as you first retired with. If you don’t intend to leave a hefty estate to your heirs then you can certainly spend more. If you do want to do so then you need to tap it more modestly.

  8. Bloke in the Fourth Reich

    And if you make it to 85 you are, at that age, unlikely to be able to enjoy a 50K a year lifestyle anyway.

  9. Care home chairs, and care, are paid for with housing equity, not pension savings. Total wealth matters but for consumption its income and capital one can sell. Hard to sell principal private residence in parts….

    4% is low. Pension consumption after 80 falls naturally unless you spend the extra on travel insurance. It gets harder to travel and more expensive as time passes.

  10. Bloke in the Fourth Reich

    The care home will be paid for by future taxpayers to thank you for having subsidised increasingly global layabouts.

  11. @John I had an Argentinian colleague who still had pension money there when the Argentinian government appropriated the pension funds a while back, maybe it’s just the next step in the US becoming a banana republic, which makes me feel sorry for all the South Americans who left to avoid this kind of thing.
    There’s a whole group of immigration lawyers and activists in Canada who are trying to claim that the US is not a ‘safe’ place so ‘refugees’ turning up in Canada have to be accepted under international rules, who knows they may well end up being right (for the wrong reasons)

  12. I expect annuity rates have risen alongside interest rates, but five years ago, £1,000,000 would have bought you around £25k pa (male aged 60, RPI5, half to surviving spouse).

  13. It depends whether you are talking about a flat pension or an inflation-proofed one.
    With negative “real” interest rates, you cannot expect to get the “real” value of your lump sum back from an annuity provided by an UK insurance company thanks to Gordon Brown who made rules reducing the RISK taken on by insurance companies investing in equities, property or anything except gilts and government-approved bonds, creating a *certainty* that they would give you back less than you paid.
    Anyone with a fully inflation-proofed is in relative clover. Part of mine and most of Chris’ is partially inflation-proofed (up to 3%pa) but only civil servants get full inflation-proofing. So we are seeing a reduction in the value of our pensions (including the state pension) of over 5% this year, worse than flat pensions suffered in most of the previous 40 years.
    IFF you have £1m in real assets with inflation-protected yields then the classic drawdown philosophy should work *except when yields on those assets go up* so sale prices go down and you have to sell more than predicted to meet your cashflow shortfall – IMHO the preferred solution is to cut back on spending in the bad years rather than run out of money later.

  14. In principle our principal DB pensions are fully index-linked but in practice not. It’s to do with contracting in, contracting out, and doing the hokey-cokey.

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