In your 50s or 60s? Your perfect financial plan for retirement

Savers need their pensions to provide £12,548 per year, which in addition to the average state pension payout of £8,060, would give them £19,000 after income tax. This would be enough to cover the essentials and regular short-haul holidays, leisure, tobacco, alcohol and giving to charity, according to Which?.

This would cost £305,710 if bought using an annuity at age 65. However, savers who kept their pension pot invested in the stock market and regularly took income, known as drawdown, would only need £192,290, some £113,000 less.

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If you do not earn enough to pay tax you can still invest up to £2,880 per year into a pension, attracting basic-rate tax relief by doing so. This will bring your total pension contribution up to £3,600, giving you a 25pc return on your money. The money can be withdrawn right away, depending on the terms applied by your pension provider. The first 25pc (£800) is tax-free, and the rest is taxed as income.

Beware pound-cost ravaging

It is important to remember that as markets fluctuate there will be an effect on the value of your portfolio, depending on the value of your stocks and shares at the point you start drawing income; this is known as pound-cost ravaging.

Dipping into a pension as markets fall means more shares have to be sold to make up the amount being taken out. This means fewer shares are owned when markets rise, reducing the size of a pot permanently.

Take the example of two portfolios, each of £100,000, one having had a very bad start (the value of the investments falling) and one with a very good start (well-performing asset with high returns). In each case the retiree wants to draw £5,000 a year.

According to calculations by AJ Bell, the fund shop, after 19 years both sets of investments can show average annual returns of 6pc. But the portfolio with the bad start (losing 30pc) has run out, while the other with the good start is still worth almost £124,000.

This article is kept updated with the latest advice.

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