How much should you draw from your pension fund?
If you decide to leave your fund invested, you need to consider your strategy for drawing income. You may decide to aim for sustainable income for your lifetime or, instead, use your fund to provide a higher additional income for the early years of your retirement.
If you are using your fund to provide an income for a specific number of years, you can set an investment strategy, forecast your investment return and draw the income required. Due to fluctuations in share prices, it would be prudent to weight your investments with secure holdings if the fund is being drawn quickly. You could create a safety margin by drawing an amount that would exhaust the fund in ten years, when your requirement is actually eight years income. You can experiment with our calculator to give you an idea of how this might work.
If you wish to provide a sustainable income for the rest of your life, the strategy becomes more complicated. The table below shows life expectancies for UK male lives and is an extract from a table published by the UK Office of National Statistics in 2013. This table probably underestimates the life expectancy of holders of pension funds and only covers males who have a shorter life expectancy than females (both sexes here ), however it is useful for illustrative purposes.
The table has four columns: exact age, expected years of life at that age, a figure to show what share of a fund you could draw,at that age, if you lived for exactly your number of expected years (ignoring any investment growth) and the final column is the approximate number of years that 20% of that age group are estimated to survive to.
The first point to note is that when you survive a year, your life expectation doesn't reduce by a year. At age 55 you would expect to live 26.58 years and if you survive to your 56th birthday, your expectation is 25.71 years - 10.5 months less. Almost a year. However, look at the difference between 70 and 71 it is now down to 8 months. This leads to an apparent paradox that at age 55, you would expect to live to 81 and a half, but if you do reach that age, you expect to see your 89th birthday! So as you get older, you run a greater risk of running down your fund if you underestimate your longevity. If you base your estimate on the "Years till 20% Survive" column, the expected years of life reduces by very close to a year for every year survived. Page 2
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