10 Things to Consider

Concerned about the financial aspects of retirement planning?

With all the talk and concern about dwindling retirement funds and our shaky economy, many retirees and soon-to-be-retired boomers are concerned about the financial aspects of retirement planning. These are 10 steps to help give you a brighter retirement.

  1. Since 6 April 2015, on reaching the age of 55 you can use your pension savings in any way you like. The first 25% can be taken as tax-free cash and the remainder used as you wish (all income or capital withdrawals subject to your marginal rate of tax at the time). However, you will not be able to use your state pension until your mid-60s or later, depending on your current age. The state retirement age is increasing with the years with on average men and woman are to be 66 by the year 2020 to take their state pension.
  2. If you are thinking about retiring soon, then it is imperative you will need to decide what to do with your pension fund. Firstly, If you have a defined contribution pension, you’ll be able to take as much money as you want out of it. But it must be noted that one-quarter of what you do take out will be tax-free, however, the rest will be taxable.
  3. If you have an appropriately sized fund and are considering an unsecured pension, otherwise known as ‘income drawdown’, then having a portion of the fund in cash to fund the first couple of years’ income payments is sensible.
  4. Consider when you want or need to take your benefits – from both state and any private pensions. You don’t have to use them at ‘traditional’ retirement ages or when you stop working.
  5. If an income is important to you, consider all the different options available to you, such as an annuity, an investment-linked annuity, and income drawdown. Each of these comes with different risks – income from drawdown or an investment-linked annuity could fall in the future.
  6. Consider the ‘cost of delay’ – if you are looking for a guaranteed lifetime income, then an annuity could be your safest option. By delaying any decision until next year, you are losing out on income this year, which could take many years to make up.
  7. Think about how much flexibility you need over your income, bearing in mind you may be in retirement for 20 plus years, and if you want to protect your spouse or partner when you die.
  8. With annuities, the income is guaranteed but may come with the risk of inflation, which means the income you receive may not buy as much in the future. You can protect your income from inflation but this comes at a cost.
  9. If you buy an annuity, don’t automatically purchase it from the company you saved with. Make sure you shop around other providers, giving full information about your health and lifestyle – this can help you get a substantially bigger income.
  10. Improved longevity needs to be considered. Even though our activities and expenditure decrease with age, income will still need to cover the cost of living longer. If you do need to replan, then it’s important to take action sooner rather than later and to avoid leaving things to chance.


Income Matters

Facing retirement with an annual income shortfall of £12,600!

The UK’s mass affluent investors[1] face an average annual income shortfall of £12,610 in retirement. This jumps to a staggering £28,000 shortfall among the mass affluent millennial population, according to the BlackRock Investor Pulse survey.

Nearly three quarters (73%) of mass affluent Britons say it’s important for them to earn an income on their investments, yet they still allocate more than 40% of their assets to cash. Perhaps unsurprising then that a third of mass affluent Britons are concerned about outliving their savings in retirement.

Mind the income gap
Mass affluent investors say they will need an annual income of £32,456 in retirement and expect that a pot of £396,910 will achieve this. In reality, they face an annual income shortfall of £12,610. This gap widens further among the millennial age group, who face the biggest disappointment. They want an income of £43,103 a year and think £300,934 will be sufficient, but will in fact experience a shortfall of £28,057 annually. Even factoring in the State Pension, millennials are still going to be short by more than £20,000.

It’s not just the retirement pot people underestimate, but also how long they are going to live. The average mass affluent millennial expects to live to 80, but one in five of them will live to 100[2] – twice as likely as their grandparents. Furthermore, they believe they’ll be able to retire at 61 – an unlikely ambition given the annual income shortage they are already facing. While those aged 35 to 44 have a more realistic expectation in believing they’ll live to 84, there is still an 18% chance that they’ll reach 100. This indicates that many are not factoring in how far their savings will need to stretch.

Advice is more than a one-hit wonder
Increasing life expectancy and the introduction of the pension freedoms has lengthened the period of time in which people can receive advice. However, 34% of mass affluent investors have only used an adviser for a one-off event. This presents an opportunity for advisers to demonstrate the value of long-term financial planning versus providing advice for one-off events.

Source data
[1] Mass affluent investors are defined as either having £100,000 personal income, £150,000 household income or £100,000 investable assets.
[2] ONS – How long will my pension need to last? https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/whatismylifeexpectancyandhowmightitchange/2017-12-01
BlackRock research conducted from July to September 2015 among a nationally representative sample of 30,500 financial decision-makers in 20 countries, aged 25 to 74 years old. Sample for UK: 4,000. The results of the survey are provided for information purposes only. The conclusions are intended to provide an indication of the current attitude of a sample of UK citizens to saving and investing and should not be relied upon for any other purpose.