Don’t fall off the retirement cliff

March 14th, 2018

An over-reliance on the state pension could prove dangerous. The £8,456.20 maximum amount of annual income it pays, for the 2018/19 tax year, is certainly an extremely valuable benefit to support your lifestyle. But on its own, will it be enough to provide for your retirement?

A December 2017 report, by the Organisation for Economic Co-operation and Development (OECD), suggests it won’t. The report warns many people could face something of a retirement income cliff – because the gap between UK employment earnings and state pension income is the largest in the developed world.

On average, state pension income equates to around 29% of what UK people earn – or less than a third of the income you currently receive. This compares unfavourably to other developed nations, where state retirement income is an average of 63% of earnings.

So if you want to maintain or enhance your lifestyle, you face a huge shortfall to make up.

The importance of planning

Understandably, many of us feel apprehensive about our retirement plans. June 2017 figures from the Office for National Statistics show 46% of working adults, who were questioned between June and December 2016, aren’t confident their retirement income will give them the standard of living they hope for. Over two-thirds have not thought how long they will need to fund retirement for. The last point is important. Thanks to improvements in living standards, people are living longer and your retirement plans need to factor this in. It’s not just about having savings for the first few years of retiring, but considering how your needs might change, and if you might require provisions for areas like long-term care.

There’s also your family’s inheritance. You may want to leave some of your wealth behind for them to enjoy, rather than spending all of it to fund your retirement.

Are you paying enough into a pension?

It’s never too early to start preparing for retirement, so if you have a few years left of working, considering your current arrangements could allow you to make better plans.

For example, you might want to pay more into your pension, or even set up additional pensions. A huge advantage of taking this route is tax relief, as the government tops up your contributions by 20% or 40% (depending on if you’re a basic or higher rate taxpayer). With the pension freedoms also opening up your options for using these savings, from 55, you have greater flexibility to shape your retirement. There are important tax considerations around making withdrawals.

The way your pension contributions are invested is another key factor. If you’re enrolled in your employer’s default pension scheme, there’s every chance it’s invested in a way that’s not fully suited to your circumstances. You might be willing to take more risk with your money, for example.

With the stakes so high, speaking to a financial adviser is recommended. They can help you consider what you want to achieve in retirement, and if you have the provisions to make it happen.

Retirement should be a chapter in life to relish, but it’s a leap into the unknown. A financial adviser can help you to plan for different scenarios, so you can look forward with confidence.

The value of your investment can go down as well as up and you may not get back the full amount invested. Accessing pension benefits early may impact on levels of retirement income and is not suitable for everyone. You should seek advice to understand your options at retirement. Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.