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You may be aware that for many people the kind of annuity rates they can get when they cash in their pension have become very disappointing. I did a quick review of the kind of annuity that you could get for a million pound pension pot, aged 65 as a man and £50,000 a year, five percent, is high. You might get just 2% from a savings account (£20, 000). However, if you can regularly earn a bit more income then that can substantially grow the effective pot that you have available.
How five days’ work a month is worth £1 million
Just five days a month at £1000 a day for ten months of the year gives you £50,000 of income: equivalent to a £1,000,000 pension pot at the rates above. Maybe you are not going to achieve that every single year but massively enhancing your pension pot for a few years can be very attractive. Too often we just assume that once we have retired, we should rely only on our pension. If you can delay taking your pension, you are likely to get an enhanced pension pot and, because you are older, a better annuity rate. This is particularly true for the state pension. A significant delay will increase the annual rate and the lifetime value. Finally, making additional pension contributions into the state scheme can be very valuable too (although there are thresholds where additional tax applies). Maintaining some regular income after your planned retirement, whether that be 60, 65, 67, will significantly increase the effective pension pot from which you draw your income.
But who is going to employ you at that age?
This is a significant challenge. I believe that the best strategy is to build up a portfolio of part-time roles, with a number of different businesses. Typically, your, skills, knowledge and experience will be most valued as a trusted advisor to the CEOs of smaller businesses. But, if you want to do just two to five days of fee earning work a month in your latter years, you need to put in place a plan while you are very much younger.
Planning my final pension pot – closing the gap
So set a target for your final pension pot: whether you need £1 million or £2 million to deliver the annuity that will sustain your income through whatever inflation occurs in the last 20-25 years of your life. Now consider whether you can realistically save enough before you retire. You can close the gap by earning fees for between one and five days a month, for 10 months of the year, at say £1,000 a day for most of the remaining years of your life to massively enhance your effective pension pot.
Plan your portfolio executive workstyle now to ‘make your future work’.
Charles McLachlan is the founder of FuturePerfect and on a mission to transform the future of work and business. The Portfolio Executive programme is a new initiative to help executives build a sustainable and impactful second-half-career. Creating an alternative future takes imagination, design, organisation and many other thinking skills. Charles is happy to lend them to you.