Save more, work longer or expect less in retirement.

5th September 2016

When it comes to retirement, one of the main things to realise is that we are all living longer, and whilst this is great news, somehow this needs to be paid for.

In the past, the majority of pension savers were members of a defined benefit (DB) pension scheme also known as final salary schemes. Poor working and living conditions meant that retirement tended to only be for a few years, and certainly not the twenty, thirty and even forty years that are the norm nowadays.  In fact, a 65 year old man now has a 50% chance of living to 87 and 65 year old woman now has a 50% chance of living to 90.

Due to this, these schemes have become increasingly expensive to run as the pension has to pay out for longer which is putting a lot of pressure on these schemes.  As a result of the increasing longevity (people living longer), we have seen DB schemes adopt a number of changes to try and contain this increasing cost, for example closing to new members, or reducing future benefits.

So instead of offering membership of a DB scheme, many companies now offer a defined contribution (DC) pension scheme with a contributory value to encourage employees to save. However, these schemes carry no guarantees on income in retirement and the amount saved, or the size of the pot and will ultimately dictate how much you will have to live off of in retirement.

The bottom line now is that in today’s world, in the main, when it comes to having a decent retirement income individuals have three main options, to save more, work longer, or expect less.

This is why it is important for individuals to review how much income they think they will need in retirement, against what they will actually get as early as possible, to have a better understanding about what they need to be saving now.

If there is a shortfall, how much more would they have to save to make this up, and can they afford to do this? How much more can they save?

If they can’t afford to make it up completely, or at all, how much longer are they going to need to work to make this retirement income a possibility? In addition, there are plans to gradually increase the age at which the State Pension can be drawn. By 2018 the age at which women will be able to receive their State Pension will rise to 65, bringing it in line with men’s state pension age. There are then plans for it to rise to age 66 by 2020 and age 67 by 2028 for both men and women. Many will need to work longer or perhaps work part time, to keep a wage coming in. If you are going to be living 20 years longer than your grandparents, should you really expect to retire at the same time, without investing a lot more into your retirement savings?

If someone realises that they are not saving enough for the retirement they would like and are unable to save any more but are unable to work into retirement, they may be disappointed with what they actually receive. If this is the case then careful money management can help individuals make the most of what they do have.  However, the value of well thought out planning from early on should not be underestimated.

See WEALTH at work’s top tips to help you with your retirement planning:

1. Make a basic retirement plan – Think about what you will be doing in retirement, how much you think that might cost and when those costs might be incurred. Build in some flexibility as it is almost certain that your plans and needs will change throughout retirement.
2. Collate information on ALL your assets – Gather up-to-date information together on all of your pensions and savings. Find out how much you can expect from your company pensions, and the value of other savings and what they are, ISAs or shares for example.
3. Get a State Pension statement – It is important that you check your State Pension record and National Insurance contributions history early. You can request a State Pension statement using a form called a BR19, which is available online or by calling the government helpline on 0345 3000 168.
4. Work out which options might be right for you and how to put your plan in place –Guidance from Pension Wise, a free government backed service might be enough, but if you have more than just a small pension you might want to consider getting financial advice. A financial Adviser should look at all of your assets and work out the most tax efficient way for you to fund your retirement income, and put the plan into place for you.
5. Be clear about all the costs involved – Whichever route you take make sure you are clear about all the costs involved. Doing it yourself isn’t free and there will usually be charges and commissions to pay. Advice can more than pay for itself, especially if it saves you from making a costly mistake.

To read the full article in Money Observer, please click here.

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