This week has seen the pension freedoms come into full effect, giving those approaching retirement far more choice when it comes to spending their pension pot. But, it also means there's far more to think about, as securing a retirement income will be one of the most important decisions you'll ever make. So, do you know how you'll fund your post-work years? If not, it's time to start thinking!
According to research from Friends Life, the majority of UK retirees plan to rely on a mixture of pensions, cash ISAs and savings to fund their retirement, and interestingly, the emphasis is different according to the age of the respondent.
For example, 29% of respondents plan to supplement their income with a savings account and 18% plan to use a cash ISA, while 17% want to downsize or sell their property to unlock funds. However, this changes when focusing on those who are already retired, with only 4% having used property funds. Instead, the majority rely heavily on existing savings and pensions, which highlights the importance of planning ahead so suitable provision is in place.
Indeed, pensions remain the most important way to save for the long term: 52% plan to use a state pension, while 39% hold a company pension and 25% a personal pension. For those already retired, 69% of retirees use a state pension, 53% a company pension and 26% a personal pension, again reiterating the need to ensure pension arrangements are available to supplement state support.
However, despite most respondents taking a combined approach when it comes to funding their retirement, the figures show that the average retiree still faces a shortfall of £95.34 per week between the cost of living and savings, based on the average total amount of retirement income of £307 per week. This level of income is insufficient for many once living and housing costs have been factored in, so it's even more important to be prepared.
"It's hugely encouraging to discover that people are preparing for retirement by putting in place such a comprehensive 'basket' of retirement products, [as] it demonstrates that people are aware of the need to plan ahead and to understand the options available to them so they can work out how best to secure their future," said Andy Briggs, group chief executive at Friends Life.
"However, while steps are being taken, our research shows there is still a gap in understanding how much income will be needed during retirement. On average, based on current savings behaviour, people are facing a financial shortfall of nearly £100 per week during retirement. This is why it is so important to take action early to be prepared so that whether you generate income from savings, property, investment or work, your future income can be as healthy as possible."
Knowing how you'll fund your post-work years really is vital, and if you're approaching that time of life, you need to understand your options. The Government's Pension Wise service will be a great place to start, as it'll give you a thorough grounding in the options available now the freedoms have kicked in. But, remember that this service only offers guidance, not financial advice, and although it could well demystify things a bit, after that you'll probably want to take it one step further by seeking a professional financial adviser.
Doing so means you'll get professional advice that's tailored to your individual circumstances, taking into account your current savings levels, the value of your pension and any other assets you have, in order to determine a solution that will deliver the standard of income necessary. It could help you fully understand the options that will be best for you, so if you're wondering how to fund your retirement, make sure to seek suitable advice and, hopefully, you won't face too much of a shortfall.
Read our retirement guides for more information
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