By Mark Soper ACII
There has been a huge amount of press recently concerning the automatic increase in Workplace Pension contributions – up to a total of 8% from this April.
Some focus has been given to the expected investment returns that may be achieved for workers when these contributions are invested – mostly in default pension funds that have been selected by employers or the pension providers.
But just how realistic are these expectations?
There is little doubt that the advent of workplace pensions – now with a more meaningful level of contribution – is advantageous for many workers who otherwise may not have made any provision for retirement. It is a form of ‘’forced savings’’ that cannot be touched at least until age 55.
But, back to returns…
Moneyweek recently published an article on very long-term returns – and US Shares have returned an average of 6.4 per cent in real terms over the past 119 years.
Across the pond, the return on UK shares has been 4.2 per cent in real terms during a period covering two world wars, the great depression of the 1930s, and the great inflation of the 1970s and 1980s.
These are indeed impressive returns – so it may be reasonable to assume that going forward shares could return 5% p.a. say, over the next 50 years – the likely period of work for someone staring work today.
However, in the retirement world, it is a different matter… and whilst some retirees may well survive for 40 or 50 years, relying on an annual rate of return of 5% p.a. would be considered very optimistic indeed.
It is also quite a different scenario when you are investing for the future rather than investing to sustain a fund when making withdrawals.
I wrote some time ago regarding ‘’safe withdrawal rates’’ and concluded that – in generic terms – there is no such thing.
At the very outset, anyone who is considering the withdrawal from pension and other funds to meet retirement income needs should undertake at least some rudimentary cash flow planning.
The cash flow plan will indicate how long the funds will last once the income need has been established and will go on to indicate the capacity to increase expenditure – either as regular spending or as one-off cash purchases or gifts.
A cash flow plan can also show the impact of market shocks on the long-term health of the funds.
Working through the possibilities available can be hugely time consuming as well as fiendishly complicated… but using the RetireEasy LifePlan allows you to test out a whole range of scenarios to see in detail how different options will affect your retirement finances.
For instance, scenarios where the returns on your pension contributions haven’t matched expectations and you have to cut your cloth accordingly…
RetireEasy Premium LifePlan allows you to see what effect (for example) a Home Downsize would have on your finances in retirement as well as providing a host of additional features and options.
In addition, you can model a Lifetime Mortgage – something many of us may well be relying upon into the future.
Fortunately, everyone with a Premium LifePlan is able to run as many scenarios through the programme as they wish to see how taking a flexible approach to future drawdowns will affect their savings… if you haven’t already tried that out, do!