Retiring at 65 - What £100K, £300K, & £500K Actually Look Like

[00:00:04][music] >> What does it actually mean to retire at 65 with a 100,000, 300, or 500,000 pounds in your pension pot? Well, the gap between those three retirements is actually far smaller than the gap between the size of those three pots.

[00:00:19]So, five times the money does not buy you five times the retirement. And once you see why, the numbers that you've been agonizing over start to matter a lot less than you may have been led to believe. Now, this one lands hardest if you're sitting there right now with a pension statement in front of you wondering whether that number is enough to allow you to stop working and to retire. Because that number is probably doing far less of the work than you may think. So, by the end of this video, you'll know exactly what each of those three pots pays you every month, which of them clears the official retirement target, >> [music] >> and the client tax trap that hits all three of them for exactly the same amount on the very same day. [music] Now, every figure I give you is what you actually keep after tax and in your pocket. So, my name's Hackett saying I've got over 25 years of the experience of helping people plan their money and their finances. And if you find this useful, please do like the video and subscribe to the channel.

[00:01:17]So, before we move on, just want to focus in on some of the assumptions that I'm going to use in this video. So, I'm assuming you're 65, [music] you're single with a defined contribution pension pot. So, basically not a final salary scheme. Assuming that your state pension kicks in at 67. So, there's going to be two years where your pension pot has to carry completely on its own. And I'm assuming about 3% growth a year after inflation once you retire. So, that's roughly, say, 5 and 1/2% growth with 2 and 1/2% for inflation taken off. So, every figure I'm going to give you is going to be in today's money, so it stays consistent throughout.

[00:01:54]>> [snorts] >> Now, obviously historically you may have done better than this with gross investment returns, but, you know, I'm not trying to be overly optimistic here or too pessimistic. And I'm also going to assume that every withdrawal that you take, a quarter of that, so 25%, is going to be tax-free.

[00:02:10]So, that's a method called UFPLS, or UFPLS, [music] and it's what we're going to be using throughout. I'm also going to assume that your spending starts higher in your active years in retirement, and dips as you slow up, and then rise again in your final years as care [music] costs start to creep in. And we're going to run the numbers all the way to 90, which leaves you a little buffer of cash at the end for any unexpected costs that arise.

[00:02:33]Now, clearly, your own situation will differ, but the shape of what follows holds either way. So, let's put those three pots side by side and see what happens. So, let's put those three pots side by side >> [music] >> and see what uh each one actually pays you. So, not the pot value, the monthly income after tax that you could take for the rest of your life. So, as you'll see here, a hundred thousand pound pot pays you one thousand four hundred and nine pounds a month, so it's about forty-six pounds a day. Three hundred thousand pounds gives you two thousand two hundred and fifty-seven a month, so it's about seventy-four pounds a day. And as you can see there, five hundred thousand pounds gives you three thousand one hundred and thirty-two pounds a month, so about a hundred and three pounds a day. But, look at the first bar and look at the last. So, five times the pot, but it's only two point two times the income. So, the pots are almost miles apart, but the retirements themselves are much closer, much closer than people may have initially expected. And to be clear, what that means in practice is that you get to keep two thousand two hundred and fifty-seven pounds a month from the three hundred thousand pound pot, but you'd actually be withdrawing about two thousand four hundred and eight pounds a month. And the difference between the two numbers is going to be the tax, [music] and it's why I'll keep giving you the net figure throughout. Those numbers also keep their buying power in cash terms. [music] It basically means it takes a bit more each year as prices rise, but because the 3% is already baked in in investment assumptions, that's what allows you to continue.

[00:04:06]Now, a crash in your first few years on retirement can do permanent damage even if markets do recover later. So, one common way that people protect against that is to keep two or three years of spending in cash. So, when markets do dip, you live off the cash instead of selling investments at the worst possible time.

[00:04:24]>> [music] >> And because on paper five times the savings ought to buy you five times the lifestyle, which you may obviously think it brings us to the obvious question, well, why don't those income scale the way that the pots do?

[00:04:38]Well, the answer is that 65, your pot is not carrying your retirement on its own.

[00:04:44]The state pension is doing a huge share of the lifting and it pays the same 12,540 pounds a year to all three of those different pots. It doesn't care how big your pot is. So, on a 100,000 pound pot, the state pension is 74% of your total income. So, your own pot contributes just 4,363 pounds a year. But at 300,000 pounds, the state pension is still 46% of your total income. Only at 500,000 pounds does your pot take over with the state pension down to 33%.

[00:05:21]That means a small pot retiree is largely funded by the state >> [music] >> and the big pot retiree is quietly funding themselves. Now, most videos on this topic will tell you that your pot size determines your retirement. But what from I've seen over the years, >> [music] >> that's only true at the top end. And for the majority of people watching this, the state pension is going to be the foundation and the pot is going to be at top up.

[00:05:46]And that flips the whole question because the state pension is the one part that I think people need to spend more time checking in on. Now, there's a full guide to topping up your state pension record on our website financialeducation.co.uk.

[00:06:01]But, the short version is that you can buy back a missing years off your national insurance record, and it costs about £957 a year.

[00:06:10]And you basically get an extra £250 back uh immediately. So, it basically pays for itself in about 3 years. So, if you like to be on pension credit, you do need to check first because topping up doesn't always pay, and the extra can actually simply be clawed back. So, the state pension is doing that much of the work, what is an extra £200,000 actually buying you? Well, surprisingly less than you'd think, and the further up you go, the less they actually buy. So, going from £100,000 to £300,000 is obviously an extra £200,000 off your own savings.

[00:06:45]But, going from £300,000 to £500,000 is the same extra £200,000 again.

[00:06:51]As you see here, you know, the first extra £200,000 lifts your income by about 60% from 60,000,911 to just a touch over £27,000.

[00:07:03]The second £200,000 lifts it by only 39% >> [music] >> to just over 37 and 1/2 thousand pounds.

[00:07:10]So, identical money in, but the percentage lift collapses [music] by a third. So, in cash, it's about £10,000 either way. [music] So, the step up is flat. Whereas, the pot it's built on keeps growing. [music] If you are in retirement or planning retirement, I'd really recommend that you do consider whether equity release is an option >> [music] >> that would be beneficial to you. And to do that, I'd recommend you use our calculator to see how much you could potentially borrow. [music] So, to use our calculator, go to our website financialeducation.co.uk, and across the top, you'll see some headings, and one of them is equity release. So, if you uh go up to that, uh you'll see uh underneath there, there's a title equity release calculator. So, if you just press on that, that'll take you to a page with a calculator on there. You just scroll down a little, you'll see there's a calculator down here that you can borrow. Just put in your details, and it'll take a few seconds, and it'll tell you exactly how much you are able to borrow, which in turn will help you to start doing some of your own retirement planning. That's the opposite of how it works while you're still building your pension, cuz whilst you're building, every extra pound has years to compound. And once you take your money out, that extra pound just gets spent, cuz there's no time left for it to multiply.

[00:08:24]>> [music] >> And that's why the step up is flat. And there's one thing the single pot projection can't always show you. And that is most people aren't doing this alone. You know, a partner's own state pension could be worth another 12 and 1/2 thousand pounds [music] a year arriving at 67. So, even a modest 100000 pound pot of their own changes this picture completely. [music] So, don't judge your retirement on one pot in isolation. Now, I'll give everything that follows on a single pot, because it keeps the numbers honest and comparable. So, just hold that partner point in the back of your mind, because it usually makes the real picture kinder than this one.

[00:08:59]Now, before all that I arrive, though, there's a two-year window where you're on your own. And that's where a smaller pot is really, really going to feel it.

[00:09:07]It's either between 65 and 67.

[00:09:10]No state pension turns up, so your pot pays for absolutely everything. And on that 100,000 pound pot, you're pulling out just under 17,000 pounds a year growth to keep that 16,900 in your pocket. And the tax is just [music] a little over 27 pounds, because your personal allowance is actually going to be doing the vast majority of this job. Do that for 2 years, and 28,293 of that pot has gone. So, 28% of everything you saved has gone in 24 months. Now, that might sound alarming, but once you save pension rise at 67, your pot's job actually shrinks dramatically. You see, under 100,000 lb pot, the yearly withdrawal collapses by about 70%. So, the pot goes from paying for everything to basically having to simply top up.

[00:10:00]And the 500,000 lb pot, meanwhile, loses only 11% of itself over the same 2-year period. And that's the gap years doing their damage, and the smaller the pot, basically, the harder they bite.

[00:10:13]>> [music] >> And then, just when help finally arrives, something strange happens to your tax bill. See, the year that your state pension starts, your income doesn't go up at all. You're still spending exactly the same amount. But what does happen is that your tax bill goes up. See, the year that the state pension arrives, your tax bill jumps by about 738 lb. And it never actually ever comes back down again.

[00:10:37]You see, your state pension is taxed on every pound, while only 75% of every pound from your pot is taxable [music] at all. So, when the state pension replaces part of your pot income, your taxable income goes up, even though your actual income doesn't move.

[00:10:53]And on the 300,000 lb pot, the tax goes from 1,821 at 66 to, as you can see there, 2,559 at 67. And the same 738 lb on all three pots. And it's identical for everyone, because the rise depends only on the size of the state pension, [music] and that's the same wherever you are. That's 12,548, typically. And your pot never enters the calculation, which is why HMRC doesn't care how much you saved. Now, one caveat is that this assumes that your pension is your only income. So, if you're still working part-time, or, for example, you've got a rent coming your numbers will look very different.

[00:11:35]Now, you might also be thinking, well, surely, you know, that's just a one-off thing. It isn't going to continue. Well, unfortunately, that £738 repeats every single year for the rest of your retirement. Only 23 years, so over 23 years to age 90, that's a thick end of £17,000 gone. And almost nobody builds it into their plan, what I've seen. And of course, the personal allowance will lastly frozen at 12,570 and is due to be frozen at at least 2031.

[00:12:05]Whilst the state pension is going to continue to rise with the triple lock.

[00:12:09]The state pension is now just £22 below the allowance. So, within a year or two, it's going to overtake it entirely and probably by next year, 2027. When that happens, every single pension in the country is going to pay tax potentially on their state pension alone before their pot has paid them a penny. Now, we'll see if that changes, but it could do, but that's where we currently are.

[00:12:32]So, let's just finish where where most people start. You know, with those official targets and whether any of these three pots actually clears them.

[00:12:40]So, Pension UK, hard who are an industry body here, say that a single person needs £32,700 a year for a moderate retirement and £40,000 for 100 to be comfortable. But on our numbers, the £100,000 pot doesn't get near moderate. You know, the £300,000 pot falls £5,619 short. And only the £500,000 pot clears it by £4,888.

[00:13:09]So, on Pension UK's own numbers, two of these three retirements are on paper a failure. But Office of National Statistics data shows the average retired household, which is mostly couples, so read it as a household figure, actually spend around £22,000 to £25,000 a year.

[00:13:28]So, even allowing for that, the target sits well above what most retired people actually choose to spend.

[00:13:36]Now, >> [music] >> unfortunately, I've watched far more people die with an untouched pot or a pot that's been hardly been touched >> [music] >> than ever actually run out of money. You see, the target isn't the problem. I think being frightened to spend what you have is the biggest issue. So, the pot that you've been staring at isn't really the number that decides this. It's the number that decides it is the one almost most people I don't think have really fully looked at. So, one thing I think you need to do is to go and check your state pension forecast on gov.uk before you check your pot. Takes about 5 minutes and it'll tell you exactly how many qualifying years you've got [music] and it shows you any gaps that you have that need filling. For most people watching, it's the bigger of the two numbers and it's the one you can still do something about. You see, your pot is the top pot. The state pension [music] is the floor that you build on. So, get that floor right and 100,000-pound pot goes a lot further than the headlines will ever admit. Now, I'd love to know have you actually checked your state pension forecast or is it still on the to-do list? Do drop a comment below and let me know. And if you did find this helpful, please do like and subscribe to the channel. And if you've got any questions you'd like me to answer, please leave them below. Finally, good luck and goodbye.