Could this ‘CHILL’ hack slice £80k from your pension target?

Retirement age is a hot topic. 

I suggest  that working longer, beyond the retirement ages that we mostly aspire to, is not necessarily such a bad thing.

Some people may feel overwhelmed by meeting their rigorous saving and retirement goals;  daunted by the popular ultra-frugal FIRE approach to life and to saving - Financial Independence, Retire Early.

The contrasting option, I suggested in one of my articles, was to CHILL, an approach where Career Happiness can Inspire Longer Lives. This is about putting greater emphasis on steering your life to a career you enjoy.

I was intrigued by a new survey of Fidelity’s Workplace Investing members, with the particular finding focused on those aged 55 and over.¹ It found that 27% now expect to work longer than planned. The primary reason was financial, with 43% saying they hadn’t saved enough. But another 19% said they found they were enjoying work and wanted to continue.

To say it again, one in five who carry on do so because they love their job.

Whether you want to work longer or have to work longer, staying in a job can dramatically change your retirement saving sums. But by how much?

Pension boost: the sums

A good starting point is considering how you get to an income of £30,000 in retirement - the number which people are targeting, on average, according to our survey.

To reach that figure with an annuity, where you hand over retirement savings in exchange for a guaranteed income, you would need around £400,000. Based on the latest best buy rates, a 65-year-old would receive £18,508 a year, rising with inflation.² Throw in the full state pension - £11,502 from age 66 - and you get a tenner more than that desirable £30,000-mark.   

To save that £400,000 over 40 years, you would need to save £262 a month, based on a 5% average annual return after charges.

Now let’s assume you’ve embraced CHILL and instead of fully retiring you carry on working one day a week.

One simple way to look at this is that if you needed £400,000 to meet your savings goals, you would need a fifth less - £320,000 - now that you’re continuing to work 20% of the time. And with the target reduced by £80,000, you may need to save less - £210 a month rather than £262.

If you decided to work two days a week, then the pension pot needed may be £240,000, not £400,000.

Now I accept that these scenarios are very theoretical and should be taken with a bucket of salt: it’s unlikely you’d work forever; it depends what you might earn from the ongoing work; you don’t know if you’ll want to keep working; and on the upside, you could carry on contributing to your pension from your part-time work, with tax relief available up to age 75. The list of ‘what-ifs’ is long.

The numbers, in the interest of simplicity, also brush over the fact you can take 25% of your pension pot as a tax-free lump sum at these levels. So perhaps the target number should be £534,000 rather than £400,000, with £134,000 taken tax-free. But then you could invest that money for more income. The multiple scenarios don’t end there - rather than buying an annuity you could keep the money invested and try to live off the investment income, the ‘drawdown’ route… the twists and turns go on and on.

So yes, pension planning is complicated, and it always needs to be individually tailored. You may need a financial adviser to devise how this should pan out. But I imagine they’d savour the challenge of incorporating ongoing work into those scenarios.

But there is a broader point I’m trying to make, and it goes to the heart of the CHILL philosophy. Namely, if you’re feeling panicked by hearing that you’ll need to accumulate a pot of £300,000, £500,000 or £800,000 to retire, then consider this: by cutting one day in five working days, you cut your pension savings needs by a fifth, irrespective of pot size.

Now that’s a wildly simplistic way of expressing it but it broadly holds true. And it is a thought that further adds to the appeal of the CHILL approach to work life and retirement living.

The government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 011 3797.

Source:
¹ Survey of Fidelity International Workplace Investing members, conducted May 2024. Findings based on 690 respondents.
² Williamburrows.com, best buy rates on 5 July. Annuity Tables | William Burrows