Five ways to boost your retirement income

Introduction

The Pensions and Lifetime Savings Association (PSLA) calculates that, for a moderate retirement, a single person will require an income of £23,300. If one assumes that the individual will receive the full £10,600 state pension per year, they will need an annuity which provides £12,700 per year as well. Therefore, they would need to save approximately £285,000 into their pension pot to achieve this.[1]

With the cost-of-living crisis and the lingering after-effects of the pandemic, ensuring you have an adequate amount of retirement income may seem difficult but there are many ways to top up your pot.

Higher-growth investments

If there is still a lot of time until when you wish to retire, you could boost your pension fund by investing in higher-growth investments. Most default schemes set up via your workplace will invest according to the needs of the majority of staff with goals towards a retirement ‘lifestyle’ or ‘target date’. However, many will give you the option of choosing a different fund. There could be an ethically responsible fund that appeals to you, or you could spread your money across several funds.

As with all higher-risk investments, there is potential for loss due to market volatility so you should review your pension investments regularly. The earlier you invest in this way, the more time you have available to recover from falls. Therefore, this strategy is more suited to those earlier in their careers.

Example:

The Nest Higher Risk Fund aims to produce higher returns than the Nest Retirement Date Fund. It does this by investing more of your money in company shares as opposed to cash and bonds, proportional to your overall investments.

The ‘Lifestyled’ option for this service will move your pot into the Nest Retirement Date Fund ten years before your retirement date to protect it from the possibility of losses you may not have time to fix.

ISAs and the Lifetime ISA

For younger savers, an ISA or LISA (Lifetime ISA) can be a good option. If you are over 18 but under 40, you can save up to £4,000 per year and the government will top up your contributions with a 25% bonus. This is tax-free, including the bonus, and you can use it to purchase your first home. Otherwise, you can withdraw money from age 60 for any purpose without the taxes imposed on pensions. LISAs can hold cash, stocks and shares, or a combination of both. You can pay into both until age 50.

This may be less practical nearer to retirement age though because it can take many years to save up a useful lump sum.

Increasing your pension savings

If you are closer to retirement age and in a Defined Contribution (DC) pension, you may be able to make extra contributions. The benefit here is tax relief, as all contributions below the annual allowance of £60,000 will qualify; however, you can only receive this relief up to 100% of your earnings – so if you earn less than £60,000 per year, the tax relief will apply up to your salary amount. If your income is above £200,000, the allowance may be even lower. Although, you can benefit from further tax relief by using unused allowance from the previous three tax years.

Delaying your retirement

While this option may seem unsavoury, delaying when you receive your pension funds for even a few years can significantly boost your retirement income. A DC pension scheme allows you more time to make additional contributions and for your investments to grow. The rates for guaranteed income products, such as annuities, tend to increase as you grow older. Furthermore, if you are still working when you do begin taking money out of your pot, you can save on paying tax on the income.

One caveat is whether there will be any charges for changing your retirement date – your DC pension provider will be able to help you decide if this is the right choice for you.

Delaying the date that you begin taking your State Pension can also affect your retirement income. If you reach State Pension age after the 6th of April 2016, your pension will increase by 1% for every nine weeks you defer. Every year, this calculates to just under 5.8% extra that is paid alongside your regular State Pension payments.

Equity release

Many people aged 55 or older are taking out equity release products to fund their retirements. Equity release allows you to access the value of your home in the form of cash – either as a lump sum or in regular, tax-free instalments (drawdown). This is becoming more popular as people are choosing to use the money to fund retirements or pay off debts. An additional benefit is that you will remain the homeowner and be able to live in your property until death or you move into long-term care.

Despite the disruptions caused by the pandemic, the median house value has risen by 53% over the last decade.[2] In 2022, the lump sum value of the average lifetime mortgage was £133,770 according to data compiled by the Equity Release Council.[3]

There are two ways to release equity from your property: a lifetime mortgage, and a home reversion scheme. Both are regulated by the Financial Conduct Authority. With the latter, you sell all or part of your home for less than its market value and then continue to stay there as a tenant. Usually, this is rent-free and the percentage of the property you retain stays the same regardless of property value changes.

With a lifetime mortgage, the loan is secured against your home and is paid off when you and your spouse die, and your house is sold by the broker. While living in the property, you can make regular interest payments or not pay any interest until the whole loan is repaid. However, unlike normal mortgages, most products do not impose penalties on missed payments.

Equity release will lower the value of your estate, but you can ring-fence a percentage of the value of your home to reserve it for the beneficiaries of your inheritance. Doing so will decrease the amount of loan you can take out but along with your pensions and investments, it may be enough supplemental income to realise your later-life dreams.

How can we help you?

To help our clients prepare for their retirement, we provide a range of financial planning services. These include:

• Retirement planning;
• Inheritance Tax planning; and
• lifetime cashflow planning.

Working with clients in these areas allows them to see if their objectives are achievable and set a plan to achieve them – all of which provides much needed peace of mind.