The problem of how to live well as a pensioner is not easy to solve, but there are ways to address it.
An ageing population coupled with an unreliable stock market has meant the Government and employers are finding it increasingly difficult to provide money for an affluent retirement.
More than ever before, the emphasis lies with an individual to ensure they have made appropriate provisions for funding their lives after work.
Stark figures offer quite the reality check: A saving of £100,000 translates to an annual average income of £3,500 for someone taking their pension at 65 if they want their income to rise with inflation.
To get an index-linked income of £10,000 a year, you need to have saved an average £285,710 by 65, according to Hargreaves Lansdown.
The Money Advice Service has an online pension calculator, which shows how much you need to save to get a desired level of income.
But while the pension system is far from perfect, it is still the best way to pull together a fund that will see you through the twilight years.
Money for free
In effect, people get free money if they save through a pension scheme thanks to tax breaks.
“A contribution of £1 actually costs the basic rate taxpayer 80p and taxpayers can, currently, contribute up to £50,000 a year,” explained Nigel Green, chief executive of advisory firm the DeVere Group.
“In addition, all income and capital gains received on a pension are tax exempt and, when you retire, you’re able to take a quarter of your pension pot as a tax-free lump sum,” he said.
For most workers, a company pension scheme should be the first port of call, simply because many will match your contributions, adding even more extra money to your retirement pot.
Vince Smith Hughes, retirement expert at Prudential, said: “The benefits that company pension schemes offer are unrivalled. Not only do savers receive tax relief, but this is also topped-up with employer contributions which, when combined, often more than double the contributions of the employee.”
And even if you don’t currently get a contribution from your employer, there’s an extra tax benefit available. That’s because of something called “salary sacrifice”.
This means you are paid less by your employers, but the difference goes straight into your pension; rather than being paid in full and then paying into a pension yourself. This not only means you aren’t charged income tax on the money, but you also aren’t charged National Insurance on it, saving you another 12%.
You can boost your payout
Workers should periodically check their pot is on track to meet income expectancies.
At this point, also check that your savings are working as hard as possible to generate healthy returns.
Look at investment fees on your fund and don’t pay for more than you need. For instance, if you only want a pension to hold certain investments, check if you can switch to a cheaper service that matches this.
You need to make sure the fees you are paying are translating into the best returns possible.
An Independent Financial Adviser can help with these decisions, but remember costs vary for advice too, so look for an adviser with appropriate expertise at a competitive price.
Retirees must shop around
Annuities are bought with pension savings to provide a regular income for life.
When people reach retirement they can boost their retirement income by simply shopping around for the best paying annuity.
The purchase is arguably one of the most important decisions that anyone will ever make – it will determine the income for the rest of a person’s life. It’s a one-off buy and once you’ve decided, you can’t change your mind.
Yet with such a crucial decision, many people fail to secure the best deal, instead opting to buy an annuity from their pension provider without even looking at the rest of the market.
According to John Wilkinson, Nationwide’s head of protection and investments, there is a difference of up to 20% on annuity rates between providers; people who shop around could boost their income by a fifth.
Wilkinson said: “Many people think they have to buy their annuity from their pension provider... This issue really needs to be tackled more widely. It is vital that the whole industry plays a part in ensuring pensioners get the best deal they can.”
Another way to boost your income is to see if you qualify for an enhanced annuity. These are available for anything from smoking to taking prescription medicines or being overweight – as well as more serious conditions – and can boost your payout by as much as 20%.
[Free guide to annuities]
Annuities are not the only option
Many people opt to buy an annuity with their pension savings, but another option is income drawdown.
You are allowed to pull a tax-free lump sum of up to a quarter of the value of your pension fund once you are over the age of 55. You could invest this to produce returns instead of buying an annuity.
The remaining pension fund stays invested and, at a later date, can be used to buy an annuity or you could receive an annual income from an income drawdown policy. Rules limit the amount that can be taken to make sure people don’t empty their pension savings before they die.
People approaching retirement and unsure of their options, should get help from an Independent Financial Adviser, who can point out the different options.
[Free guide: How to avoid running out of money during retirement]