In the ideal world your hard work during your working life culminates in assets and savings that can be used to fund a comfortable and enjoyable retirement. Unfortunately, real life isn’t the ideal world, and while having a large pension pot and a number of assets will help towards funding a financially stress-free retirement, there are a number of risk factors that can impact your savings and assets and result in making your retirement not as comfortable as you initially imagined. Fortunately, these risks can be prepared for and, as such, can be avoided – or at least mitigated.
Living a long and healthy life is most people’s retirement goal, but when it comes to finances it can put stress on your savings. Research by Retirement Advantage published in November 2017 found that over three quarters of over 50s underestimate how long they will live, with men underestimating on average by six years and women by eight years. If you do underestimate your life expectancy it will often result in your pension fund starting to run low and you may have to start having to use money or assets that you had hoped to leave as inheritance. To avoid this risk, when saving for retirement it is better to plan to have more money than you expect to need so that even if you end up living beyond 100 you will still have enough money.
It should also be noted that while you may receive the State Pension for your entire lifetime (as long as you are eligible to receive the pension) the amount you get each month will unlikely be enough to fund a comfortable lifestyle – but it will provide an additional income source that will need to be backed-up by your own private means. Your entitlement to the State Pension will depend on how many years National Insurance contributions you’ve made, for example to get the full State Pension you will need to have made 35 years of National Insurance contributions, while to get any State Pension at all you will need to have 10 qualifying years on your National Insurance record. If you think it is unlikely that you will get the full State Pension it is even more important that you factor in the longevity risk in your retirement, this is because you will be receiving less from your State Pension which means that your savings could run out quicker than if you were on a full State Pension.
When saving for retirement you will likely to choose a pension as part of your savings plan, but with all pensions schemes there is an element of risk involved. All pension schemes work by investing the money you contribute into your pension, often this is a good thing as long-term investments will normally result in you gaining money on the amount you contribute, however all investments are risky so there is always the possibility of your pension not making the gains you expected or, in the worse case scenario, actually losing money. To help reduce the risks involved with your investment it is essential that you continuously monitor how your investments are performing – currently all pension schemes should provide you with the ability to do this and to move money from investments that are not performing as well as you expected. As well as this, when you get closer to your planned retirement age it is usually advisable that you move your pension savings from higher risk investments to those that may provide a lower return but which are a safer investment to help protect your pension from losing money that you won’t have time to make back.
If you are 55 or over and own your own home, you could consider using equity release to significantly boost your retirement income. You can normally release up to 40% of the value of your home and continue to live there, usually without having to make any repayments.
If you are on a fixed retirement income the rate of inflation could see you getting less for your money, especially if the economy goes through a period of high inflation. While the State Pension may rise to help pensioners cope with the rate of inflation, any fixed pension will normally stay the same. While you won’t have direct control over inflation there are some ways to help it have less of an impact on your retirement income. A good idea is to have a number of sources of income for your retirement, including pensions and savings. Having money in a savings account that matches or beats the rate of inflation will mean that even a decade or more after retiring your savings will have retained its value. Normally the best saving rates are available on accounts which require you depositing your money for a fixed number of years, such as fixed-rate bonds, so it is important to keep this in mind if you are planning on using savings accounts as part of your financial retirement plan.
An annuity is a popular way of ensuring you have a steady income for your lifetime, however even annuities are not without risk. Annuities work by being bought using the money saved in a pension upon your retirement and then will give you an income for life. The biggest risk with an annuity is that upon the time of your retirement there are poor annuity rates available. The only way to get the best possible deal with your annuity is to look around and get independent financial advice before making a decision. Another risk with annuities is that if you choose a fixed income your payments are impacted by inflation. There is the option of an increasing income annuity which will help protect your income from inflation by either increasing each year by a set amount, for example 3%, or provide you with an income that is adjusted yearly in line with inflation.
If possible, having a range of retirement investments for example a workplace pension, long-term savings and stocks and shares will help to diversify your retirement savings and help mitigate potential risks.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.