If you’ve been contributing to a pension for many years, then clearly some of your income will come from the arrangements you have made. However, figures from the Department of Work and Pensions show that occupational and private pensions form less than half of the average person’s income in retirement.
Here, we look at the various sources that may make up your retirement income and why it’s so important that you develop a strategy for how you fund your income in retirement.
Recent Department for Work and Pensions figures show that occupational and private pensions make up less than half the average person’s retirement income.
This research also shows that most pensioners receive at least part of their income from benefits; typically, the State Pension.
So, if your pensions make up less than half your retirement income, where is the rest likely to come from?
The DWP say that 60% of pensioners received investment income in 2017/18, demonstrating that investment income is one of the most popular alternatives to pensions.
Many people contribute to an ISA, either as an alternative to building up a pension pot, or in addition to pension savings. You can contribute up to £20,000 into an ISA in the current tax year, and you’ll receive interest and growth tax-free.
And, if you’re between the age of 18 and 39, you can contribute £4,000 of this allowance into a Lifetime ISA and benefit from a government bonus equivalent of £1 for every £4 you save – as long as you use the money to fund the deposit for your first home or your retirement.
When you choose an ISA, you’ll have a choice between an easy access Cash ISA, where you’ll benefit from a fixed rate of interest, and a Stocks and Shares ISA, where returns are based on market performance.
Cash ISAs are low risk although the returns can be disappointing, especially in a low interest rate environment. Stocks and Shares ISAs offer greater potential for return but, as the value of investments and the income they provide can rise and fall, you may get back less than you invested.
Beyond ISAs, you could also consider other sorts of investments such as bonds or managed investment funds to name a couple. Here, your savings will be pooled with other investors in order to spread your money across lots of different investments; often stocks and shares in the UK or overseas or government bonds.
These funds are designed to provide you with capital growth, although some also pay dividends which you can also use towards your retirement income. Again, as these are investments, the value can rise and fall, and you may get back less money than you originally invested.
Considering that house prices have increased significantly in recent years, retirees are increasingly using the value of property to help fund their retirement.
Many people bought their home when they were younger and have seen the value rise during the time they have been repaying their mortgage.
A popular idea is to downsize and move to a smaller/cheaper home, banking and spending the profit.
Some investors also use Buy to Let property as an alternative to a pension. The idea here is to buy property, rent it out to generate additional rental income, and benefit from any capital growth over the longer term.
Carry on working?
The DWP research found that 17% of pensioners were in receipt of ‘earnings’ in the 2017/18 tax year. And, according to recent Office for National Statistics figures published by the BBC, just under 1.2 million people over the age of 65 were still in work.
Many retirees are choosing to take ‘phased’ retirement or stay in work, in order to generate additional earned income. With one in ten over-65s still working, income from employment or self-employment could well form an important part of your ‘retirement’ earnings.
Making sure you take the right income at the right time
Of course, with such a varied number of different retirement income sources comes increased complexity as to how you fund your retirement.
Before Pension Freedoms you may have retired, used your pension fund to buy an Annuity, and lived off this monthly income and your State Pension.
Now, with retirees benefiting from a lot of eggs in a lot of baskets, how do you turn this into a coherent retirement strategy? For example, if you’re planning to continue to work part-time, you might not need to buy an Annuity immediately. And maybe you want to take a smaller income and defer your State Pension until you’re older?
In addition, there are likely to be tax implications for whichever route you take. If you want to take more than 25% of your pension fund as a lump sum, you’ll typically pay tax. Your earned income may well be taxed at source. And what about cashing in any non-ISA investments? There could be Capital Gains Tax to pay if investments have grown.
Consider that, according to the Office for National Statistics, a 65-year-old man now has a 50% chance of living to 87 and a 65-year-old woman a 50% chance of living to 90, your retirement income might need to last 20 or 30 years.
The likelihood is, therefore, that your retirement income will come from different sources at different stages. Initially, more may come from employed income while, later on, you may downsize or cash in some of your investments to generate the money you need to live on.
One of the ways that a financial planner can add real value is in helping you to develop a strategy for your retirement. We can help you consider what income sources you have available and when to use them tax-efficiently.
To discuss your retirement planning, request a call back.
This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Ermin Fosse’s services.
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