Ways to make your pension last longer

7 min | 08 July 2024

The Chase team

Many retirees are withdrawing more from their pensions to keep up with the cost of living, which could leave them without enough to sustain their lifestyles. So are there ways to make your retirement savings last longer?

The rise in the cost of living over the last few years has led to an increase in the money people are withdrawing from their pensions. In the 2022/2023 tax year, £12.9bn in taxable payments was withdrawn from pensions flexibly – compared with £11.2bn in 2021/2022 and £9.3bn in 2020/2021.

These figures don’t include the 25% tax-free lump sum that people over 55 (set to increase to 57 in 2028) are legally allowed to take from their defined contribution pensions, so the amount they are withdrawing is probably even higher. This all adds up to a much bigger risk of simply running out of money in your later years.

Here are some ways you could plan ahead and build on your retirement savings to give them a better chance of sustaining your needs in retirement.

1. Work out how much you will need – and for how long

The Office for National Statistics has a life expectancy calculator (Opens in new window) that could give you an idea of how many years your pension will need to generate an income. For example, a man today aged 45 can expect to live until 84, a woman until 87, and in some cases well beyond those ages.

In terms of how much money you’ll need, it depends on your lifestyle. The Pensions and Lifetime Savings Association (Opens in new window) has estimated how much on average a couple or single person will need to support their retirement each year, whether their living standards are minimum, moderate or comfortable. Don’t forget that these figures can rise due to inflation.

Minimum living standards (per year)

  • Single person: £14,400
  • Couple: £22,400

Moderate living standards

  • Single person: £31,300
  • Couple: £43,100

Comfortable living standards

  • Single person: £43,100
  • Couple: £59,000

Online pension calculators can help you forecast the income you’ll get when you retire. This could give you a better idea of how long your pension could last and how much you should aim for in terms of income and savings.

2. Maximise your pension contributions

Whether it’s a workplace plan, or you have a personal pension consider contributing the maximum allowed each year. If you find yourself with some extra cash, you could ask your employer if you can make additional voluntary contributions to your workplace scheme. Please note that if you have previously drawn any benefits from a defined contribution pension your annual pension contribution limit (Opens in new window) will be reduced from £60,000 to £10,000. If you're a high earner, your annual pension contribution limit can also be reduced.

3. Withdraw gradually and stay invested

Pension drawdown is when you take an income from your pension savings. From the age of 55 (57 from 2028), you can take up to 25% of your total pension pot as a tax-free lump sum, up to a limit of £268,275, leaving the rest invested. Not all pension providers offer drawdown, so it’s worth checking if yours does.

For example, if your total pension pot is worth £80,000, you could take £20,000 and not have to pay any tax. You will normally need to pay income tax when withdrawing from the remaining 75%. This type of ‘partial withdrawal’ gives you control over when you decide you want a regular income from the rest of your fund, because the chances are that you may still be working and not ready to regularly withdraw.

By keeping within the tax-free limits and leaving the bulk of your pension invested, it will have a chance to continue growing. Tax rules around pension investments are generally favourable, which could be better for your fund’s returns later on. Please note that you will be subject to higher rate income tax rates if your total income (Opens in new window) is higher.

As with any investment, the value of your pension fund can increase or decrease depending on where it’s invested, so you may wish to seek financial advice about what’s best for you; Chase is not a pension specialist.

4. Look at other sources of income

Before you dip further into your pension, look at any other savings and investments you might have – could they help fund your annual income needs? People tend to spend more money at the start of retirement, especially if there’s a bucket list to pay for. Spending tends to be lower in the middle years and increases again in later years to cover the cost of care.

5. Consider an annuity

An annuity is a product you buy from an insurance company that pays you a regular income for the rest of your life. You’ll pay for an annuity with a lump sum upfront from some or all of your pension pot.

The income is guaranteed, and how much you receive depends on the type of annuity you buy as well as interest rates at the time. So when interest rates are high, an annuity could be a good option.

Annuities are useful if you want the reassurance that comes with knowing you’ll be able to cover your bills whatever happens. There are downsides to consider, and once an annuity is agreed, it can’t be changed.

Whether you get a good deal or not depends largely on how long you live. If you die 10 years after buying an annuity, you’re unlikely to have received all of your pension pot – yet if you live into your 90s, you may end up receiving even more than the original amount.

If you’re not in good health or make certain lifestyle choices, you may receive a higher rate if the insurance company thinks you have a shorter life expectancy. Buying an annuity can be complicated, so it’s important to get some financial advice before making a decision.

By starting the process early when you’re thinking about how much you will need in your retirement (and where it’s going to come from), you’ll be able to approach this part of your life in a confident position and hopefully in a better financial standing.

Looking for somewhere to keep your savings? Bank with Chase and you can open a saver account. Start saving with as little as you like, and we’ll calculate your interest daily and pay it monthly.

18+, UK residents. A Chase current account is required to open a saver account.

Disclaimer: As with all investing, your capital is at risk. The value of your portfolio can go down as well as up, and you may get back less than you invest. A pension may not be right for everyone and tax rules depend on individual status and may change. If you are unsure if a pension is right for you, please seek independent financial advice. The Hub is intended as a knowledge portal to provide information on a range of topics, including financial products. Articles may reference products and services that Chase UK does not currently offer, including pension products. This article is for information only and does not constitute financial advice.

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