The Retirement Dream - Interest free retirement

03 Feb 2021

In a perfect world, we can visualise ourselves retiring and living off the interest on our investments. Our capital stays intact and everything is moonshine and roses.

Is it possible to retire on interest only? It is a possibility if you have more than you need in your pension pot. 


Let’s say you have £1 million in your pension pot at retirement. If it is invested at 6% annually, that’s £60 000 a year in retirement money. Added to that is social security/national insurance old age pension and possibly a company pension scheme. When you die, your beneficiaries will receive the entire £1 million.

Unfortunately, most will not have enough saved up to achieve this. If your goal is to try and live on interest only or at least minimal drawdown, then you need to consider a few things.

  • Inflation – every year inflation eats away at your investment. To keep your original capital investment, you would have to forfeit part of your income (your annual interest pay out of 6% minus the yearly inflation of your annual pension) Remember to factor this in when calculating your needed income.
    Your income target should be based on the last years of your life and not the first years for an interest free retirement to work for you. This means more money in your pocket during the first several years of retirement, which could be saved for the latter years.
  • Emergency fund – If you are only living on interest, then you would need an emergency fund to cover unexpected costs. As per the example above, if you buy a new car for £10 000, then you would only have £990 000 remaining, meaning less annual interest and monthly income. You would have to lower your monthly expenditure to make up for the £10 000 loss.
  • Excess capital is key to an interest free retirement. Reverse calculate your needs. If according to the example you require £55 000 a year to survive, then you only need £917 000 in capital to generate your retirement income. The remaining £83000 can be used for emergencies or other ad hoc expenses throughout retirement
  • Market volatility – Remember that no one can predict the markets. You could potentially earn more interest but could also earn less than you would need. Diversifying your portfolio could spread your risk and help earn decent returns to cover your income.
  • Don’t forget about fund and admin fees, and taxes – To cover fund fees, your investment would have to achieve 6% plus the annual fund fees. And don’t forget tax. Is your pension fund in a tax deferred account or would you be taxed? This all affects your pension pay out. *

Try to rely on your company and state pensions and savings as much as possible to take the strain off your private pension’s capital.
It is vital that you discuss your ideal retirement with your financial adviser. They can help plan the intricacies of retirement income, and ensure that your desired retirement lifestyle remains the same throughout your retirement years and that you don’t end up with a shrinking income. [email protected]

Please note, the above is for education purposes only and does not constitute advice. You should always contact your deVere Acuma adviser for a personal consultation.
* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.