Are you at risk of outliving your pension?

7th August 2019

We spend much of our working lives contributing to a pension to create an income that affords a comfortable retirement with a few luxuries. But a survey suggests that many saving into a pension are worried about running out.

A poll conducted by FT Adviser asked financial advisers what their clients planning for retirement two decades away were most concerned about. Some 72% said living longer than pension savings would last came out top. Two other responses also highlighted worries about finances during retirement:

  • 10% said clients had concerns about having enough to fund social care if it were needed
  • 8% responded that their clients’ biggest fear was having enough to spend on luxuries when they retired, indicating some are worried about the quality of life they’ll be able to afford in retirement

Why is outliving a pension a growing concern?

Whilst living longer than your pension will last has been a concern in the past, it’s one that’s affecting more people now. Of course, planning retirement is personal but there are four key reasons why it’s a growing trend:

1. Longevity: Life expectancy has risen significantly in recent generations and that means pensions need to last even longer. In the past, a pension had to last perhaps 20 years. Today, it’s not uncommon for retirees to live 30 or even 40 years after they give up work. Longer lives are clearly positive, but it does present more challenges when it comes to managing retirement finances.

2. Potential care: Coupled with rising longevity is the fact that more of us will now need some form of social care. The majority of those requiring care, whether home care services or residential care, will need to pay for at least a portion of their own care costs. The cost of care can be significant and should be factored into retirement plans, but knowing what should be set aside is difficult.

3. Flexible pensions: Prior to 2015, most people either had a Defined Benefit pension or purchased an Annuity, providing them with a guaranteed income for life. However, Pension Freedoms mean this has changed. More people are choosing to access pensions flexibly, changing the amount they withdraw to suit them. This does have benefits, but also means individuals now need to take more responsibility for how they use a pension.

4. Uncertainty: The above three points all contribute to a feeling of uncertainty. It means that some saving for retirement now may be unsure if they’re on the right track and the lifestyle their efforts will sustainably afford them once they reach retirement. Understanding how much you need to save to achieve the retirement you’re looking forward to is important for easing concerns.

Alternatives to your pension

With so many people worried about outliving their pension, it’s important to look at what other assets you can use should this happen. It’s a step that can give you greater confidence and lead to a financial plan that includes arrangements should something unexpected happen, providing you with a financial safety net.

  • State Pension: First, over your years working, you’ve probably built up some State Pension entitlement. At the moment, you need 35 qualifying years to receive the full State Pension of £168.60 per week (£8,767.20 annually). If you have fewer qualifying years, you’ll receive a portion of the full State Pension. You can check how much State Pension you can expect to receive here.
  • Property: For many retirees, property is one of the largest assets they own. However, it’s often overlooked as part of retirement planning. You may want to leave your home as an inheritance to family, but, if needed, it can be used to provide an income in retirement. Products that release equity locked in property aren’t suitable for everyone, but may be worth considering if pension savings are dwindling.
  • Investments and savings: Over your life, you may have also built up savings and an investment portfolio, which can be used effectively to provide an income during retirement. At times, people can be reluctant to use these after a lifelong habit of saving. However, it can offer you security and comfort.

Entering retirement with financial confidence

To fully enjoy retirement, confidence in your financial position is important. This is where financial planning can add value. Financial planning can help assess how all your assets can be used effectively in retirement and how to use them to ensure sustainability.

It’s a process that can also help you answer those ‘what if’ questions. If you’re worried about how the cost of care would deplete assets or what would happen if you lived five years longer than expected, financial planning can give you an idea of the short, medium and long-term impact. Cashflow planning can, for instance, allow you to see a visual representation of how your wealth may change depending on the decisions you make and factors that are outside of your control.

If you’re planning for retirement and are concerned about outliving your pension, please get in touch. We’ll work with you to understand what your current financial position is and where adjustments can be made to get the most out of your money.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.