Society is changing. So is retirement. So what is really happening, and how is it going to affect you?
Quite simply, people are living longer. Most people expect to live for 20 or 30 years (or more) in retirement. Developments in medical science and biotechnology mean that it is now estimated that 30% of people being born today are likely to live to be 100.
At Hastings Investment Management, we believe that these developments have a fundamental impact on financial provision in retirement. Quite simply, traditional pension schemes were not designed to provide an income for this long. That is why most final salary pension schemes have closed and why the Government is steadily putting back the age at which the State Pension becomes payable.
At the same time, interest rates and annuity rates are at record low levels. It can be disastrous to set your income in retirement at a very low level at the outset. You cannot change this at a later date, and your income in retirement will never recover.
It is for these reasons that many people today are deferring retirement or phasing into retirement on a gradual basis.
It is also a fact that most people have several jobs in their career and, with this, several different pension pots. It is also true that most people have little idea of what their income in retirement is actually likely to be.
There is now a growing body of support, both in government circles and the national media, for advice to become compulsory at retirement. This demand is because too many people make poor choices at retirement, which impacts on their income and lifestyle for the rest of their lives.
The points to consider
1. Plan before you get to retirement
It clearly makes sense to be building up your pension provision throughout your working life.
Whether you have been doing this or not, the years leading up to your retirement are very important. This is the time to look at how you can boost your pension and to take account of how the fund is invested. It is also a good time to start thinking through your options at retirement.
2. Tax-free cash
You are probably entitled to take a tax-free cash sum from your pension fund at retirement. And if so, how should you best use this cash? And what will be the impact on your future income?
3. It pays to shop around
Annuity rates can vary a lot, so it rarely makes sense to just accept the rates offered to you by the company your pension fund is with. There are also many options on what sort of annuity to take.
So, it really does pay to shop around. Even better, take professional advice – it will almost certainly be worth it.
4. Enhanced pension annuities
If you are in less than perfect health, are a smoker or have a medical condition, it is quite possible that you will qualify for an enhanced annuity.
Rather than buying an annuity, drawing down on your pension fund is becoming increasingly popular and, indeed, made ever more flexible by the Government. More often than not, our clients opt for this route at retirement rather than purchase an annuity.
6. Using your other assets
Most people have other assets by the time they come to retire. It may be through other savings and investments, buy-to-let properties, windfalls and inheritances, or just the equity in their own property. As you are planning for the long term, it makes sense to take a look at all your assets and consider how they can best be used to deliver the income you will need.
7. Supporting your children
In today's world, parents are increasingly looking to help their children and grandchildren with a financial start in life. This may be through giving them a very good education or in helping them get on the property ladder. It pays to consider the best and most tax-efficient ways to do this.
8. What about the next generation?
Inheritance Tax is now becoming a serious issue, even for 'normal' families. Many thousands of people are being caught in its net every year. With the threshold for Inheritance Tax frozen at £325,000, and Inheritance Tax levied at 40% above this, the Chancellor of the Exchequer stands to be the greatest beneficiary of many estates. Yet much can be done to legally avoid or reduce this liability. The point is that to achieve this, careful planning is needed.