Going back 30 or 40 years, retiring at the age of 65 and living off of your state pension for the rest of your life was achievable. This can be partially attributed to life expectancy, which was much lower in the 1980s. For example, in 1988 the average male could expect to reach 72, while the typical female would reach age 78.
Fast forward to 2018 and the Office for National Statistics (ONS) said the average male lived for seven years longer than in 1988 and the typical female for about five more years.
It’s clear to see that living off the state pension alone is extremely unlikely for most people in 2020 and traditional estimates of the ideal amount for a comfortable retirement are falling short.
While increasing longevity is a good thing, it also presents challenges. According to a report from the World Economic Forum, the UK’s retirement savings gap stood at £8 trillion in 2015, and that is expected to widen to £33 trillion by 2050.
The report claimed UK residents should expect to live eight-and-a-half years longer than their retirement pot. With the highest burden on women.
The odds of reaching 100 are 50/50 for a 20-year-old in the UK today. By 2050, reaching this milestone will be far less rare – so what do you need to consider, and which sources of retirement income will help you reach your century? Could cash flow forecasting, and the help of a professional financial planner, help you to map out your financial future?
Are there pension or savings caps?
In 2020/21, you have an annual pension contributions allowance of £40,000 and a pension lifetime allowance of £1.075 million.
It’s important to note the differences between contributions and values with both of these limits. Contributions are what you can put into your pension each year, while the value of your pension can grow over time if it performs well.
You can bring forward any of your unused annual allowance if the amount you paid into your pension in one of the three previous years was less than £40,000.
Using your £20,000 annual ISA allowance is another tax-efficient way to build up savings for a long retirement. Any growth and withdrawals will be tax-free, unlike the withdrawals from your pension which are taxed at your marginal rate if it exceeds the personal allowance. If you’ve fully used your annual ISA and Self-Invested Personal Pension allowances, you can still invest in funds and shares.
Any income or gains may be subject to income and capital gains tax, although you do have your annual personal allowance, dividend allowance and capital gains tax allowance to use first.
Start saving early
The key to any long-term savings strategy is to start early, if possible. If you’re over the age of 22 and earning more than £10,000 a year, you can get the ball rolling with a workplace pension.
This usually requires you putting at least 5% of your salary into a pension, while your employer is obliged by law to contribute a minimum of 3%. Both parties can put in more if they choose.
Based on current projections, those in their 20s right now are likely to retire sometime in their mid-2060s.
Estimates suggest placing around 13% of your pre-tax salary each year into a pension from the age of 25, although this percentage increases the longer you wait to start saving.
If you are unable to start young, then you may wish to consider contributing a larger portion of your salary, if this is feasible. Alternatively, you could consider appropriate methods of investment.
Currently, 35 full years of national insurance contributions (NICs) entitle you to £175.20 a week, or £9,110.40 a year, that goes towards your retirement.
If someone was to retire today at 65 on April 2019’s average annual salary of £30,000, and they receive a full (new) state pension of £9,110.40, they would need to generate around £21,000 a year from their private pension pot to maintain their quality of life before becoming a centenarian.
On top of drawing a full new state pension of £175.20 a week, you can access your retirement savings in several ways.
One option to consider, if you think there’s a chance of you reaching age 100, is a lifetime annuity. Often, these offer a guaranteed income for the rest of your life.
When you’re nearing retirement and have a clear date in mind, you can purchase one of these products and get the income paid monthly, quarterly, biannually or annually, and receive it in advance or arrears.
However, you should consider that these products also generally offer very poor value for money as the effective rate of return is low.
The income is also flat unless you build in an index factor, which will increase the income every year. Unfortunately, this costs more and so your income will start from a lower level.
Should you continue working to fund your retirement?
In March, prior to the Coronavirus outbreak, the UK’s employment rate was at a record high of 76.3%, according to figures from the ONS. After further analysis, it becomes clear the UK’s booming employment rate was almost entirely driven by older workers. In particular, changes to the state pension age for women have resulted in fewer women retiring between the ages of 60 and 65.
Even though those working into their 60s will no longer be paying NICs that count towards state benefits, adopting a more phased approach to retirement can top up your pension pot when the time comes to access it.
As each generation lives for longer, it’s inevitable they will need to work longer to fund their retirement. That’s particularly true when you consider that the number of valuable final-salary pension schemes is reducing, and the defined contribution schemes are considerably less generous.
Research from Canada Life last year claimed more than 23 million savers are braced to work beyond the age of 65, with many admitting they need to continue to earn a wage due to insufficient pension savings. That’s before taking into account the rising costs of living and the potential for prolonged spells of low-interest rates.
If you are concerned about your ability to secure your desired lifestyle in retirement, you may benefit from the assistance of an expert financial planner. If you would like to know more about longevity and how we can assist you through our expert financial advice and the implementation of cash flow planning, please get in touch.
The contents of this article do not constitute financial advice. The impact of taxation (and any tax relief) depends on individual circumstances. This has been prepared based on our current understanding of UK Law, Taxation and HMRC practice, all of which could be subject to change in future. The value of investments can fall as well as rise and it may not always be possible to receive back the sum initially invested. Past performance is not necessarily a guide to future investment returns.