Is Your Pension Going to Be Enough?
The new state pension amounts to £160 per week. This gives men and women of retirement age an annual income of £7,658. This is the full amount – whether you receive this much will depend on your National Insurance record.
Whether or not you can live on the new state pension alone depends on the lifestyle you want when you retire. For many, it is nowhere near enough. Even the government has stated that the state pension available is not enough. In their document, Your State Pension Explained, it is explained that, “for many people, the state pension is only part of their retirement income.” Therefore, savings, investments or rental income are commonly used to supplement retirement funds.
For many current and future retirees funding retirement is a stressful question, but one which needs answering.
What are your retirement goals?
Your plan for retirement will help you decide what is the best pension route for you. Do you want to spend more time with your family? Take up a new hobby? Increase your savings? Whatever your plans, you are going to need income, but not everybody has the same goals. Which retiree profile do you resonate with?
- Avoid running out of money
For most, being comfortable during retirement is the aim. Many current and future retirees fear having to rely on their children or returning to work if their pension pot is not sufficient.
- Maintain or improve lifestyle
Retirement is a period of life to enjoy and for some people the aim is improve their lifestyle. A key part of this is to maintain or grow purchasing power over time to counteract inflation throughout retirement.
- Increase wealth
For those who are very financially comfortable for retirement the goal is often to grow their wealth further. Individuals in this category tend to invest and pass the funds down to children and grandchildren.
How will you fund retirement?
Once a retirement goal has been decided, a plan can be formed on how you will achieve it. Estimating a cost based upon your non-discretionary spending, discretionary spending, inflation and investment time horizon. With life expectancies on the up, planning for a long retirement is now the norm.
In turn, you can then calculate your income. It is best to determine this figure without taking investments into consideration. The most common non-investment income sources for retirees are:
• State pension
• Business and property
Making the most of your money
Whilst there are some traditional ways to fund retirement, there are also other investment opportunities which have become commonplace in the pension landscape for many.
An Individual Savings Account (ISA) allows you to save or invest tax-free. Many retirees utilise their ISA account and leave their pensions untouched.
This is achievable as money withdrawn from an ISA isn’t regarded as income for tax purposes, so you can draw down upon it without entering a higher-rate tax band. Other retirees opt to use an ISA for emergency situations for one-off expenses.
Wellesley offers an ISA eligible bond which is listed on the Irish Stock Exchange. This unique investment is used to acquire loans made by Wellesley which are secured against UK residential properties. Being ISA eligible, this means you could hold your investment within an ISA, allowing you to earn tax efficient fixed returns.
Enhanced Equity Income Fund
A choice for post-retirement income is enhanced equity income funds. The sector is diverse, which allows investors to earn a potentially greater yield on their savings, especially considering the current low interest rates.
Retirees seeking these high dividends will have to accept some risk. These funds used derivative trading to fund higher dividend payments. The strategy aims to provide a growing level of income which is higher than that of the FTSE All-Share Index.
Are you on track for a comfortable retirement?
Research suggests that, on average, those aged 55 to 65 have £105,496 in pensions. A pension pot of £100,000 would mean an income of around £5,000 per year in retirement. Further investigation unveiled that to live at the minimum acceptable standard during retirement costs £9,700.
With such a discrepancy in figures despite such a large pension pot, relying on a state pension and workplace pension simply isn’t enough to fund retirement for the majority.
Future retirees need to be proactive with their money to secure a comfortable financial future and look into investment opportunities.