I’m 68 and had a SIPP worth around £120,000 in April last year. I withdrew £10,000 – so around 8% of the fund – which alongside my state pension took my pre-tax income to about £18,000. The remaining fund then grew by 5%, so I now have a fund worth about £115,000.

Given inflation is expected to run at somewhere north of 8% in 2022, I’m thinking of withdrawing an extra £1,000 in April 2022 to cover my costs (so I’ll withdraw £8,000 from my fund, leaving me with around £107,000).

I just wanted to check if this approach is sensible or not? I know sustainability is important but I also want to enjoy the healthy years of my retirement.

Robert 

Tom Selby, AJ Bell Head of Retirement Policy says:

For the past decade inflation has not been at the forefront of savers’ and investors’ minds. It is always important to take its impact into account – even relatively benign inflation can have a big impact when compounded over years – but a figure hovering somewhere between 0% and 3% meant it never grabbed headlines.

That has changed in 2022, with surging energy prices and the end of lockdown combining to push CPI inflation to a record 6.2% in February.

Price increases are expected to continue as the year goes on, straining the household budgets of Brits of all ages.

One of the main things you need to think about when taking a flexible income from your pension is what is sustainable.

That will depend on personal circumstances, including your age, wealth, health and investment returns.

As a very rough rule of thumb, a healthy 65-year-old should be able to take between 3% and 4% of their fund value, rising each year in line with inflation, and be confident their money will last throughout retirement.

Based on this rule, someone with a £100,000 pot at age 65 might be able to take between £3,000 and £4,000 a year from their fund. However, a sustained period of high inflation could push this figure down as the amount you need to withdraw to maintain your lifestyle rises.

That isn’t to say that you shouldn’t withdraw more than this – it is after all your money – but rather to help you understand the potential risk that you will exhaust your fund early.

Let’s consider your situation. If we assume your income needs remain static throughout retirement, withdrawals increase by 2% a year from 2023 onwards and investment growth is 4% per year after charges, your fund could run out around your 84th birthday.

However, if inflation runs at 4% a year and withdrawals increase at that rate – meaning spending power is maintained - the fund could be exhausted three years earlier.

Either way there’s a good chance your fund will run out early, so think about how you’d fund your lifestyle if that happened.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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