The adverts are referring to the UK GAD rules (limits set by the UK Government's Actuary Department). Since March, you have been able to take 150% of the limit as income.
What does that mean in practice? Well, based on a 60 year old as at today, the GAD rate is 5.3% pa. So, potentially that means 7.95% pa as income from the fund can be taken.
Where, you are probably asking yourselves, is this income coming from?
Let’s keep it simple (ignore tax and personal allowances and the effects of inflation as this blog would become a maths nightmare!)
Example
A 60 year old has £100,000 in a pension and is persuaded to take maximum ‘income’ of 7.95% pa on a monthly basis- £662.50
He is reasonably cautious,invests well and gets a 5% annual return.
How long would his money last? ( even if he never increased his income to cover inflation)
His money would last 23.5 years and then he would have nothing. And,during that time, he would have had no increases in income for the whole time!
So, nearly 24 years then?
Pensions are not free and neither is the fund managment. So, think again.
1. UK Pension
Let’s redo the figures. A cost for a UK pension that is professionally managed reduces the returns by around 2.3% per annum ( all costs included).
So, how long would the money last now?
About 15.5 years, again with no increases.
Can it get worse?
2. Offshore Pension
Yep, it can. Some offshore products and investments have all manner of extra fees and costs and the reduction in returns are often at least 4.5%- sometimes a lot more.
So, how long would the money last now?
Only 14 years, again with no increases.
What happens when the fund is empty?
Not only will the pensioners have no private pension income in later retirement, there will be nothing to leave to the family.
So the adverts that offer you the chance to ‘’maximize’’ your income are in fact telling you to spend your capital. You will run out at some point and have to rely on state handouts.
I will talk about sustainable income another time. In the meantime, I will leave you with this thought;
Going for maximum income is like filling a bath with a large open plughole, unless the taps are really full on (very high investment returns- with all the risks attached ), the bath will empty.