Retirees face income shortfall risk

Retirees looking for the security an annuity provides may be facing lower retirement income than expected as the average annuity rate fell by 2.90% between July and September (Q3).

As well as this, although pension funds have returned a 0.45% on average during Q3, this is still significantly lower than returns gained last year, which stood at 1.77% on average.

Rachel Springall, finance expert at Moneyfactscompare.co.uk, explains that the pandemic has had a significant impact on retirement savings.

She said: “A third (36%) of pension funds fell during Q3 2021, which is why consumers would be wise to keep a close eye on where they have their money invested. Those who saved £100 gross per month for 20 years into a personal pension would have built a pot of £53,157 on average, and taking a standard annuity at age 65 would result in a yearly income of £2,200.

“The majority of pension fund sectors are still offering positive returns, but there has been a notable shift compared to Q2 2021, when 91% of pension funds returned growth compared to 64% in Q3 2021. The average pension returned less than 1%, at 0.45% during Q3 2021 compared to 4.1% during Q2 2021. Compared to the equivalent quarter a year ago (Q3), fund returns have worsened slightly in 2021, but it is worth remembering that 2020 overall was hit hard by the impact of the Coronavirus pandemic. The volatility to fund sectors makes it ever-more prudent for consumers to monitor where their cash is invested, but it is also important that they seek advice to ensure they don’t switch their funds in haste.

Retirees who may be facing a shortfall in their retirement incomes should consider ways of boosting their pensions.

Homeowners may want to consider tapping into the wealth they have built up in their home. A popular way of doing this is to downsize to a smaller, cheaper property. Downsizing not only allows homeowners to release equity they have in their homes, but moving to a small property can often result in lower bills and household costs.

For those who do not want or are unable to move home, an option could be equity release. Equity release allows homeowners to unlock equity in their home by taking out a loan that does not have to be repaid during the borrower’s lifetime unless they move into permanent care. Although repayments do not need to be made, equity release can have an impact on the borrower’s long-term finances, particularly on the inheritance they leave behind, so it is essential that those considering this option seek independent financial advice before taking out an equity release plan. More information about equity release can be found here.

Another way retirees can help boost their incomes is by investing in a buy-to-let (BTL) property. A BTL will normally provide retirees with a regular returns via rent paid, which can be a good way to shore up the shortfall in their retirement income. Although a BTL investment can provide a great way of boosting incomes, it is important to remember that there are tax implications with a BTL investment, as well as ongoing costs that may be payable on the property. For more information about investing in a BTL read our guide on becoming a BTL landlord.

Workers nearing retirement and who are concerned about a possible retirement income shortfall can consider working for longer. Postponing retirement allows workers to save more money into their pensions, which provides them with a larger pension pot when they do finish work. As well as this, delaying retirement means that workers do not take money from their pensions until a later date, which can help to make the money last for longer.