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Using Investments and Pensions to Generate a Sustainable Retirement Income
As independent financial advisors working with expats, we understand the challenges of securing a reliable income in retirement that provides a desired level of living but also peace of mind that your resources won’t run out. Achieving this requires a strategy that balances flexibility, risk, sustainability and tax efficiency.
A common starting point for retirement planning is the “4% rule”, which suggests withdrawing 4% of your portfolio annually (adjusted for inflation) to maintain income over 30 years. e.g. a £500,000 pension pot could theoretically provide a sustainable income of £20,000 a year.
While this guideline provides a useful framework and starting point as a “rule of thumb”, modern market conditions and individual circumstances often call for a more tailored approach especially if you are residing overseas.
What is the 4% rule, and is it still relevant?
Developed in the 1990s based on historical U.S. market data, the 4% rule assumes a balanced portfolio of 60% equities and 40% bonds. However, its applicability today is questioned due to:
- Evolving Market Dynamics: Lower bond yields, increased life expectancy, and global economic uncertainty make rigid withdrawal rates less practical.
- Currency and Tax Implications for Expats: Fluctuations in exchange rates and differing tax treatments can affect income stability.
- Varied Retirement Horizons: Expats often have unique timelines and goals, requiring more adaptive strategies.
- Shifting needs in retirement: retirement lifestyle is not as linear as it once was. Those retiring in their early 60s can often enjoy a couple of decades where they are still active and able to enjoy travel and hobbies. This means potentially spending more in these years before the time comes to seek the security of a fixed income.
A Modern Approach: Rather than adhering strictly to a fixed withdrawal rate, retirees should adopt a flexible strategy, adjusting withdrawals based on portfolio performance and changing needs.
UK Pension Access: A Changing Landscape
The UK pension landscape has evolved significantly, offering retirees greater choice and flexibility. The three points below show how pension access has evolved to grant more freedoms to retirees:
- Annuities: Historically, most retirees were required to purchase an annuity, providing a guaranteed income for life. While this ensured security, it often lacked flexibility or growth potential.
- GAD Rules (Capped Drawdown): In 2006, the UK introduced Government Actuary’s Department (GAD) drawdown rules. This allowed retirees to withdraw a capped amount annually, providing more control over their pensions while limiting the risk of depleting funds prematurely.
- Flexi-Access Drawdown (2015 Onward): The introduction of pension freedoms in 2015 marked a turning point. Retirees can now access their pensions as a lump sum or take flexible withdrawals without caps, enabling tailored income strategies. However, this freedom requires careful planning to avoid running out of funds or incurring high tax charges.
Expats must also consider the implications of accessing UK pensions while living abroad. Thanks to double tax agreements with the majority of countries in the world, you should only pay tax where you are resident however this often also means that you will be taxed on the pension commencement lump sum (the PCLS which represents 25% of your pension).
If you have other invested pots such as ISAs, general investment accounts or offshore bonds then you need to consider how best to access them with factors such as tax, currency, risk and succession planning in mind.
Strategies for Sustainable Income
- Diversify Your Investments
A diversified portfolio combining equities, bonds, real estate, and other asset classes can help mitigate risk and provide multiple income streams.
- Leverage Flexi-Access Drawdown Wisely
Flexi-access drawdown offers retirees control, but managing withdrawals requires careful attention to sustainability and tax efficiency.
- Incorporate Annuities for Stability
Although no longer mandatory, annuities can still play a role in retirement planning by providing a guaranteed income for essential expenses. Retirees might consider allocating a portion of their pension pot to annuities while investing the remainder for growth. The challenge is finding providers that offer annuities to non-residents.
- Adopt a Bucket Strategy
A “bucket” strategy divides assets by time horizon:
- Short-Term: Cash and low-risk investments for immediate needs.
- Medium-Term: Bonds or income-focused funds for the next 5–10 years.
- Long-Term: Equities or growth investments for later stages of retirement.
This approach minimizes the risk of selling growth assets in a downturn to meet immediate expenses.
Cashflow Planning to help map out your future
The sooner you adopt cashflow forecasting into your financial plans the better. Even during the accumulation phase where your focus is on working, saving and investing you should have an eye on the future and your retirement horizon, no matter how far away it might seem.
Our article here explains the process and benefits of creating cashflow forecasts to help map out your future and start preparing for the life you want in retirement.
Sustainable retirement income requires a flexible and adaptive approach. While guidelines like the 4% rule provide a foundation, they must be adjusted for individual circumstances and market realities.
By combining a well-structured investment portfolio with strategic use of pension access options, retirees can confidently enjoy their golden years without financial stress.