This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxford).
Will you have enough money to sustain you in retirement? According to the UK Poverty 2019/20 report, over 2m people live in pension poverty. This refers to when “A person’s resources (mainly their material resources) are not sufficient to meet their minimum needs (including social participation)” in retirement. The biggest subsets seem to be in London (23%) and Wales (20%), but it also affects people across the whole UK.
One of the most worrying trends is that the percentage of pensioners privately renting and in poverty has gone up – from 30% to 35% since 1999 (partly due to rising rent prices). Here at WMM, we believe that everyone should have the opportunity for a comfortable retirement. In this article, therefore, we suggest some ways to help people avoid pensioner poverty as they prepare for retirement during their careers.
State pension review
For most people, the state pension will form a core pillar of their retirement income. Yet it will not be sufficient (on its own) to cover most people’s expenses. As such, it is wise to build up your maximum state pension entitlement alongside other retirement savings and investments.
In 2021-22, the full new state pension grants you up to £179.60 per week – i.e. £9,339.20 each year. To get this you need at least 35 years’ worth of qualifying National Insurance Contributions (NICs) on your record. Consider checking your record on the government’s website and talk to your financial planner about whether it is worth topping up any “incomplete years” with voluntary NICs.
Start saving early
When it comes to saving and investing for the future, one of the biggest assets a young person has is time. Compound interest allows you to “snowball” your wealth growth as the years go by, and the earlier you start the better.
As an example, suppose you invest £20,000 into a pension at the age of 23. Assuming a 6% real return (e.g. after fees and inflation), by year 10 this could have grown to £35,816. By year 20 it could stand at £64,142, and by year 30 it might be as much as £114,869.
Notice how, in the later years, the growth increases dramatically. By starting early with pension contributions, therefore, it is possible to greatly reduce the risk of pension poverty.
Have a plan for your home
One of the biggest outgoings most of us will face throughout our lives is our rent or mortgage. The advantage that homeowners have, however, is that these costs are dramatically reduced in retirement – since, by this point, the mortgage is often repaid.
Renters, however, could face over three decades of rental costs amounting to £100s, £1000 or more each month. Over this time, landlords are also likely to increase rents to help cover their own rising costs.
This is not to say that everyone should aim to own their own home before they retire. However, people who plan to continue renting need to factor this extra cost into their retirement plan.
Check strategy over time
As many people near their retirement date it is common for them to start “de-risking” their retirement portfolio. This gradually moves money out of more volatile assets – such as stocks and shares – and into more stable ones, like bonds.
This helps to preserve your wealth if a market crash happens in the years near your retirement date. Sadly, in 2020 many people’s retirement savings were disproportionately harmed when the markets plummeted due to COVID-19. People who held a mixture of asset classes, however, were typically less affected.
Here, it is worth speaking to your financial planner as you start thinking about your retirement date – to make sure you are exposed to a comfortable and appropriate level of risk.
Interested in finding out how we can optimise your financial plan? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469