Are you adequately prepared for retirement? Hopefully you've got your income stream organised, but there are fears that many could be in for a shock.
A report from the International Longevity Centre-UK (ILC-UK) has found that as many as 1.4 million pensioners could face inadequate retirement incomes after the new pension freedoms come into force. According to their calculations, even if all those approaching retirement were to buy an annuity, over half (or approximately 1.1 million people) wouldn't be able to secure an adequate income without the use of non-pension assets or additional benefits on top of the State Pension.
This rises to 1.4 million if all those with defined contribution (DC) pensions – the most common type of workplace pension arrangement – take full advantage of the flexibilities and empty their pots when they're able to. The picture isn't any better for those retirees who choose to put everything into a savings account, and even keeping the funds invested poses a risk, as in both of these scenarios there's a chance that the money could run out before death.
Life expectancy has a lot to answer for here, particularly given that people typically underestimate their life expectancy by four years or more – if you live longer than you initially assume and try to divide your pot accordingly, spending your savings too early is a real possibility. That's why seeking the right advice, and making decisions based on your particular circumstances, is vital.
However, what's also vital is that you understand the new pension flexibilities set to be unleashed in April. Unfortunately, many people don't – research from Prudential has revealed that one in three of those retiring this year haven't even heard of the pension changes set to come into force, but those who do appear to be sensible about the whole thing.
For example, just one in 50 of those surveyed plan to withdraw their whole pot and blow it on big ticket purchases, while 32% will be more likely to consult a financial adviser when the new rules come into play. This is something that will always be recommended, as although the reforms offer more flexibility, they've also made the decision more complex. It's vital to be aware of the risks involved as well as the benefits, and that way, you can be confident your pension will last and you'll be left with a retirement income that's truly adequate.
Of course, if you're hoping to secure a retirement income that's comparable with the one you had during your working life, your pension fund will need to be pretty big. While those approaching retirement may not have much time to bulk up their fund, those who are still early in their career have plenty of time to prepare – and as the reports highlight, the importance of planning can never be underestimated.
Being part of a workplace pension scheme should be high on the list of priorities, and with auto-enrolment now becoming entrenched, more and more people are getting in on the action. Utilising other long-term savings vehicles will never go amiss either – maximise your tax-efficiency with an ISA, potentially a stocks & shares version if you've got an appetite for risk, as anything you can do to save for the future will pay off when retirement appears on the horizon.
Find out more about the pension freedoms
Check out the best ISA rates to boost your savings pot
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