24 Jul 2023
Inflation has remained stubbornly high, with the average UK household facing living costs that are around 20% higher than a couple of years ago. Lumin Wealth’s managing director Martin Cotter explains what this means for your retirement.
People typically have numerous plans and goals for their retirement, but too often not enough is done to financially prepare for it.
We come across many clients who are surprised by the amount of money that needs to be saved up. Rampant inflation has also exacerbated potential income shortfalls. The inflation rate is decreasing, but prices are still going up (just not as fast as before). This article outlines the key issues retirees need to weigh up.
Income shortfalls
Many people approaching retirement no longer benefit from a guaranteed retirement income via a defined benefit pension scheme. During retirement the financial situation typically changes from accumulation (saving surplus income) to one where expenditures need to be funded from your assets, such as investment accounts or rental properties.
How much do you need for retirement?
The answer depends on individual circumstances, mainly your expected income shortfall, investment returns, inflation, and the planning horizon. Inflation is currently high and is projected to stay well above the Bank of England’s long-term target rate of 2% over the next 18 months. The increased cost of living means that retirees in the current climate may need to save more for a comfortable retirement.
Our clients often ask us about the affordability of an early retirement. Watch out for a bigger income shortfall when retiring before State Pension payments commence at age 66 (67 from 2028). A robust financial plan can incorporate differing State Pension circumstances, large one-off expenditures (eg. gifts, family weddings or special holidays), and can assess the impact of higher inflation, lower investment returns, or asset longevity.
Sustainable retirement income
Nowadays, retirees have the ability to change the shape of their retirement income. This can often mean allocating a higher budget for when you expect to be more active, and less for later life stages.
In practice, a given amount is transferred from a pension or investment account at regular intervals, while the remaining assets continue to be invested.
The main alternative to this flexible approach is to buy an annuity from an insurance company, which provides a guaranteed lifelong income stream. Annuity rates have increased on the back of higher interest rates, but annuities lack flexibility and certain benefits in the event of death.
Consider tax aspects
Pensions are outside of the estate for inheritance tax purposes, so it may make sense to use other assets first during retirement. Income tax is also due on pension withdrawals (a 25% lump sum up to £268,275 can be taken tax-free), while other assets may be free from tax, depending on your individual circumstances.
It’s important not to sleepwalk into retirement. Call 03300 564 446 or get in touch via our contact form to gain a professional opinion on your retirement journey from one of our financial advisers.
