Has the pandemic left you worried about your retirement? If it has, you aren’t alone. A recent report by the Equity Release Council suggests that the pandemic has left many of us concerned about retirement.
Two of the biggest issues for those surveyed were running out of money and the level of comfort they can expect.
Now is a great time to review your retirement plans and to think about where your money in retirement will come from. Will your income be sufficient to provide you with the lifestyle you want?
Read on for the five places that your income in retirement may come from.
1. Earnings
For most people, the days of finishing work on a Friday and beginning retirement on the following Monday are over. It is far more common for people to take a more transitional approach to retirement.
This flexible approach, in which retirees stay on part-time or in a consultancy or mentoring role, allows people to reduce their workloads and improve their work-life balance whilst continuing to bring in an income.
According to a 2019 report by financial services provider Aegon, almost half (49%) of Brits aged 50 and over favoured a transitional approach to their retirement. For comparison, only 31% preferred a traditional ‘cliff-edge’ strategy.
Furthermore, a study by the University of Manchester found that around one in four retirees actually returned to the workforce in the first five years after their initial retirement.
If you enjoy your job, continuing to work in a reduced capacity can be a great way to supplement your income in retirement.
2. State Pension
Whilst it may not form the majority of your income in retirement, the State Pension can form the bedrock of your retirement plans. You won’t be able to access it until at least the age of 66 though, so if you retire before then your income will have to come from other sources.
The full State Pension for the 2020/21 tax year stands at £175.20 per week, or £9,110.40 annually. The government’s triple-lock system ensures that the State Pension keeps pace with the cost of living. It increases annually in line with the highest of these three measures:
- Price inflation
- Average earnings growth
- 5%
To qualify for the full amount of State Pension, you must have 35 ‘qualifying years’ on your National Insurance record.
If you have gaps in your record, such as any time you spent raising a family or in full-time education, you can apply for State Pension credits. You can check the government website to see if you’re eligible.
3. A Defined Benefit pension
A Defined Benefit (DB) pension, also known as a Final Salary pension, can be a valuable source of income in retirement. Although less common now than they used to be, the public sector and some large companies continue to offer them.
A DB pension is usually calculated based on:
- Number of years worked
- Your pensionable earnings (such as an average salary or salary at retirement)
- Accrual rate (the proportion of your earnings for each year that you were a member of the scheme)
One of the biggest benefits of a DB pension is that it provides you with the financial stability of a guaranteed regular income. This can make budgeting in retirement easier.
Furthermore, many DB pensions also rise with the rate of inflation, so you know that your pension will remain just as valuable in real terms as time goes on.
4. A Defined Contribution pension
A much more common form of private pension is the Defined Contribution (DC) pension. You build up this fund through your contributions and those made by your employer. You also benefit from tax relief.
Once you reach retirement age, you will have several choices regarding how you access this pension. If you prioritise economic security in retirement, you can buy an Annuity which will provide you with a fixed income for life.
Alternatively, you may prefer to leave the fund invested and use Flexi-Access Drawdown to withdraw funds when you need them.
The pension product you choose can depend on a variety of factors. To find the one that is right for you, speak to us.
5. Income from investments
You may have investments you’ve built up over your working life and that provide you with a significant income in retirement.
This might be traditional investments, such as gilts, bonds, and dividends from shares. It could also come from other sources such as an Individual Savings Account (ISA) or as a regular income from Buy to Let properties that you own.
Get in touch
A holistic approach to retirement planning can take into account all your income streams in retirement and work out how they fit together. If you want to ensure that you have enough income to support your desired lifestyle in retirement, we can help. Please email info@investmentsense.co.uk or call 0115 933 843
Please note
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investment (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.
The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of, and reliefs from taxation may change in subsequent Finance Acts. The Financial Conduct Authority does not regulate tax advice or estate planning.
