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5 million over-50s heading for a retirement crisis – are you one of them?

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One of the most common questions clients ask us is: “will I run out of money in retirement?”

Making sure you have “enough” to live the lifestyle you want when you retire is likely to be one of your key financial goals. However, new research has revealed that a staggering 90% of private sector workers with defined contribution pensions will not be able to afford a comfortable retirement.

The study by the Pensions Policy Institute (PPI) found that most people will be forced to live on less than their expected income, and that the pandemic had made the situation worse.

The think tank warned that even individuals with defined benefit (or “final salary”) pensions from their employer may still struggle to generate an adequate income in later life – particularly those who joined these schemes latterly.

Read on to find out more, and for ways you can tackle any pension shortfall.

Just one in three can expect a “moderate” standard of living in retirement

The PPI report warned that a low State Pension and increasing unemployment were key factors that would leave a quarter of people approaching retirement unable to afford an “adequate” standard of living.

The full State Pension – £9,340 in the 2021/22 tax year – pays just 24% of the national average income. Relying on it means that you’ll likely not have enough to live the lifestyle you want.

The pandemic has exacerbated these problems, as many over-55s were forced into leaving work early. Redundancies have also been higher for older workers when compared to other age groups throughout the crisis.

According to the Pensions and Lifetime Savings Association, just one in three people can expect a “moderate” life in retirement, which is equivalent to £20,200 a year in income.

If you’re concerned that you won’t have enough to live the life you want, here are four things the PPI suggest could help to mitigate the problem.

Contribute more

One of the ways that you can ensure you have enough for your retirement is to increase your contributions while you are still working. Under the current rules, you can save up to £40,000 (or 100% of your earnings) into a pension tax-efficiently.

If you are paying into a workplace pension it could pay to review the amount you are contributing. The PPI have called on the government to double the current minimum auto-enrolment contribution to 16% of wages to ensure workers were saving enough.

Of course, the earlier you start saving, the better. Compound returns over many years can help to boost the value of your fund, while regularly reviewing your level of contributions can also keep you on track.

Work longer

If there’s insufficient money in your pot, one option is to continue working for longer. This has two main benefits:

  • You can continue making pension contributions to increase the size of your fund. The tax relief and employer contributions you receive could further boost your pot.
  • Your pension fund will have to last for less time, making it more likely that you’ll have “enough”.

Instead of retiring completely, perhaps you could consider a phased retirement? Working part-time, on a consultancy basis, or setting up your own business could help to supplement your income, allowing you to maintain your desired lifestyle.

Ensure you receive the full State Pension

In recent months there have been several news stories about retirees caught up in State Pension underpayment scandals.

One of the most significant concerns 200,000 women who are owed money after underpayments totalling around £3 billion were uncovered.

While the State Pension may not be enough in itself to fund your retirement, it’s important that you claim what you are entitled to. Get a State Pension forecast from the government website and consider making up any gaps in your National Insurance contribution record to ensure you receive as much as you can.

Change your spending

If you reach retirement and you’re worried you don’t have enough, you may have to rethink your planned expenditure. Perhaps you’ll need to settle for a more modest car, or trips to Europe rather than a round-the-world cruise?

Working with a financial planner can add value here. We use sophisticated cashflow modelling software that can consider your assets and expenditure and create a plan that ensures you don’t run out of money.

This can give you a useful insight into any changes you may need to make to ensure your savings sustain you for the duration of your retirement.

Get in touch

If you want to understand whether you have enough to live the life you want when you retire, we can help. Please email hello@sovereign-ifa.co.uk or call 01454 416 653 to find out how.

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