UK retirees among poorest in Europe. Here's how to boost your later-life income

Article written by Kellands Hale, our preferred independent advice firm.

This article is not intended to be financial advice to any individual. The views expressed are those of the author and Moneyfactscompare.co.uk does not endorse the content.

When measured against both state and private pension averages around Europe, the UK often falls far down the list of the most well-off countries.

Data published by the House of Commons Library revealed that, when measured as a percentage of previous earnings, the UK’s total pension income ranked 21st worldwide. Meanwhile, all of the top 10 countries listed are in Europe.

So, what factors are blocking British retirees from being better off? Furthermore, how can you avoid having your later-life income eroded by these elements?

Keep reading to find out three financial aspects that could affect your later-life income and how to overcome them, plus three unmissable financial opportunities to prioritise in retirement.

Inflation is a normal occurrence within a growing economy, but without forward planning, it can also erode your later-life income – particularly if you hold much of it in cash.

After the peak of the pandemic subsided, inflation began to rise throughout the UK, US and Europe. Here in Britain, inflation peaked at 11.1% in October 2022 before beginning to gradually decline again. According to the Office for National Statistics (ONS), inflation stood at 6.7% in the year to September 2023.

Yet even when inflation hasn’t been rising sharply, as it has done in the past two years, it can still deplete the real-terms value of your retirement fund over time. The Bank of England (BoE) has set a target inflation rate of 2% – and if this remained steady throughout your retirement, your wealth’s spending power could be significantly diminished over time.

Indeed, an example offered by Nest Pensions shows just how detrimental inflation can be for your cash. If you put £10,000 in savings today, and inflation remained at a consistent 2.5% rate for the next 25 years, your money would be “worth” just £5,394 in 2048.

Fortunately, keeping a significant portion of your wealth invested throughout your retirement can help keep the effects of inflation at bay.

Although there is some risk involved with investing, equities typically outpace the rate of inflation over the long-term – so remaining invested, rather than drawing your entire pension in cash at the start of retirement, could be constructive.

There are two common types of tax you could be liable to pay when you retire, especially when you begin to cash in investments. These are Income Tax and Capital Gains Tax (CGT).

You’re likely to attract an Income Tax liability on the following forms of retirement income:

• The State Pension
• Withdrawals from your defined contribution (DC) pension
• Defined benefit (DB) pension income
• Earnings from part-time work
• Rental payments from properties you own

What’s more, if you have built up an investment portfolio you plan to use as part of your later-life income, or you receive funds from the sale of a business, you may need to pay CGT on both of these.

As such, it’s easy to lose track of how much total income you have in retirement, especially if you’re drawing from multiple sources. You may find that you are pushed into a higher tax bracket, or face multiple tax bills at once.

More positively, if you’re concerned about paying more tax than necessary in retirement, financial planning could be of great value to you.

We can map out your prospective annual retirement income before you stop working, so you know how much you can expect to pay in Income Tax and CGT when the time comes.

As you may have experienced in the past three years, a volatile stock market can be nerve-wracking for those relying on an income from invested assets.

Indeed, a large portion of your income later in life is likely to come from investments, the value of which can fluctuate over time. These include:

• Your DC pensions
• Equities and other investments held within Individual Savings Accounts (ISAs)
• Non-ISA investments
• Any properties you own.

On the other hand, as you read earlier, keeping all your wealth in cash to avoid investment loss may only leave it vulnerable to the corrosive effects of inflation.

Importantly, trying to time the market as you approach retirement could only lead to disappointment. Although tempting, treating the stock market like a game can increase your financial stress, and may not produce the risk-avoiding results you hope for.

So, as an alternative, it could be wise to keep an eye on how markets are performing in the five years leading up to your retirement, without reacting to what you see. During this time, your Kellands financial planner can offer bespoke advice that is tailored to your appetite for risk and desired retirement date.

This is just one example of how being patient and observing market behaviours without panicking can help you over the long-term.

Although there are factors that can have a negative impact on your financial stability later in life, there are also opportunities you can capitalise on when you retire.

Here are three examples.

The State Pension triple lock is likely to increase the State Pension offered to eligible retirees by 8.5%, as a result of the average increase in wages across the UK.

Once the triple lock is in place, you could receive up to £221.20 a week when you reach State Pension Age, which currently stands at 66. While this sum is unlikely to make up most of your income in retirement, the triple lock could offer you more than £11,500 on top of your additional income streams.

If you’re unsure whether you are eligible for the full new State Pension, you can find out by checking your National Insurance (NI) record.

Plus, until April 2025, you can pay voluntary National Insurance contributions (NICs) you’d previously missed, perhaps boosting your eligibility for the full State Pension amount. You can read our full insights on back-paying NICs before the deadline on our news page.

Another essential change to pension legislation that could offer widespread saving opportunities is the removal of the Lifetime Allowance (LTA) tax charge.

In April 2023, Chancellor Jeremy Hunt announced that the tax charge, which previously applied to individuals with pension wealth surpassing £1,073,100, would be removed with immediate effect. Previously, those with pensions that had crossed this threshold could have been met with an additional tax charge of up to 55% when they drew their funds upon retirement.

Now that the LTA tax charge no longer factors into your tax burden in retirement, this could be the perfect opportunity to remain invested within your pension for as long as you can. There are several key benefits to doing this:

• You could see greater compound returns in the decades to come, which may help pay for later-life expenses such as care
• You could leave your pension as a tax-efficient inheritance when you pass away. Your pension does not usually form part of your estate for Inheritance Tax (IHT) purposes – so keeping as much wealth as possible within a pension could reduce your family’s IHT bill later.

With these points in mind, it could be wise to begin thinking about how the removal of the LTA tax charge could work to your family’s advantage.

Discussing this with your Kellands financial planner could enable you to plan ahead for a prosperous retirement that makes the most of this legislation change.

As you have read throughout this article, there are both pitfalls and upsides to retirement in the UK.

While other countries’ retirees may have different circumstances, professional planning can help you fund the retirement you’ve always wanted – without worrying about money along the way.

A Kellands financial planner can assist you by:

• Utilising high-quality cashflow modelling software that can help you create a retirement plan based on data, not just ideas
• Managing your invested assets to position them favourably for your retirement, where possible
• Discussing how your tax liability may change in retirement, and working to reduce it where we can
• Welcoming your whole family into the conversation, so everyone can remain on the same page as the years go by.

To learn more about how we can help create a bespoke retirement plan with you, email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

The Financial Conduct Authority does not regulate estate planning, tax planning, cashflow planning or will writing.

All contents are based on our understanding of HMRC legislation, which is subject to change.