Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
WHEN you find out the kind of income you’re headed for in retirement, it can come as a bit of a shock.
I’m often asked if there’s one thing above all others that can boost your retirement prospects - and the short answer is ‘no’. The reality is that it requires you to use all the tools available - saving for longer, saving more, retiring later and, I’m afraid, learning to live on less. But it’s not all doom and gloom.
Here’s four simple aims that I have for my own retirement that I hope can help deliver the life after work that I want and maximise what I have saved.
1. Living in a lower tax band
For most people, pensions are where it makes sense to do most of your retirement saving. The main reason is that pensions enjoy advantages in the tax system.
Pension contributions benefit from tax relief, which means that a £1 contribution today costs you 80p if you’re a basic-rate taxpayer, as little as 60p if you’re a higher-rate taxpayer and 55p if you pay additional-rate tax. Exactly how it works will depend on the way your pension scheme operates its tax relief.
When you eventually take income from your pension, 25% of the whole pot can be accessed tax-free, but the rest is taxed as income. That means the maximum benefit comes when you contribute at one level of tax but withdraw at a lower level.
I’m making it part of my plan to ensure I can live on an income in retirement that does not exceed the higher-rate band for tax - if I’m lucky enough to get that much! - so that I make the most of the rules as they stand.
If you’re a high earner now you may see that as a dramatic cut in income. However, there’s several reasons why your income in retirement should stretch further than if you earned the same amount as a working-age person.
Many of the costs that reduce our spending power as working-age people fall away once you pass retirement age. National Insurance is no longer due for those over their State Pension age, and because you no longer need to set aside amounts for saving inside and outside a pension, what you have left to spend is higher.
Plus, if you’ve managed to repay a mortgage by the time you retire, that’s also an extra outgoing that you won’t have to make.
2. Getting the biggest State Pension I can
The State Pension makes up an important part of retirement income for almost everyone.
What makes the State Pension so valuable is not simply the money it provides - a maximum £179.60 per week currently - but the fact that it is guaranteed and uprated by at least the rate of inflation every year. The State Pension is often what retirees rely on to know that their essential bills will be covered even if other sources of income are uncertain and prices rise.
Guaranteed, inflation-proof income is expensive to replicate in other ways. For those with savings held inside pensions, the only option is to purchase an annuity which is inflation-linked and, based on current annuity rates, it would take a savings pot of £337,000 just to replicate the maximum annual income from the state pension of £9,339. That’s based on a healthy 65-year-old purchasing an annuity that lasts for life and is uprated with Retail Price Index (RPI) inflation.
Ensuring you are entitled to the maximum State Pension possibility, therefore, is vital. To get the full State Pension you’ll need 35 years of National Insurance contributions. If for some reason you have missing years - for example because you took time off work, or are self-employed - catching up should be a priority.
3. Trying not to worry about care fees
We’re all aware that care fees represent a huge potential cost in later life. Even with the Government’s recent pledges around social care funding, it’s still likely that someone with prolonged social care needs in retirement is going to face costs that are beyond all but the most wealthy.
Being realistic about my own retirement prospects, should care fees land I will only be able to meet them for a short period before my money runs out. For that reason, I’m choosing not to plan specifically for care costs but will instead concentrate on repaying my mortgage.
If I need to use equity in my home, or sell it completely, to pay for care - that’s a bridge I’ll have to cross when I get to it. I don’t particularly like that idea but it is largely out of my control - so I’m choosing not to worry about it.
4. Getting myself a side-hustle
The tools you have at your disposal to increase your retirement income are limited. You can save more or you can retire later. While I don’t much fancy working full-time deep into my 60s, I do hope to be physically active enough in those years to keep working in some form.
Working part-time is definitely part of my plan and I hope to develop some of my outside interests to the stage where they can bring in a little extra income. Are you a keen gardener who could help your neighbours? Could you tutor children or students? Do you have a second language that could be used to offer language lessons?
Earning a little extra means you can perhaps push back the moment you need to rely solely on savings for income, meaning that you’ll be able to take a slightly higher income later on.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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