Budget 2021: Experts outline state pension changes
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Inflation hits the elderly particularly hard, as they spend more on essentials such as food and fuel that tend to rise fastest of all. Worse, many live on the fixed income paid by their savings and annuities.
Next year will be even tougher for pensioners, as the Bank of England calculates inflation will hit five percent, while scrapping the state pension triple lock will give retirees a pay rise of just 3.1 percent. In real terms, this is a cut.
Following 2015’s pension freedom reforms, many pensioners now choose to leave their money invested in the stock market and draw down income as they need it.
This allows their money to benefit from stock market growth, but leaves their pension pot vulnerable to a crash.
It also means they need to manage their money carefully, to avoid overspending in the early years and running out later. This isn’t a problem with annuities, where the income is guaranteed to last as long as you do.
Retirement is a marathon not a sprint so plan carefully, said Ben Hampton, retirement advice specialist at fund manager Abrdn. “You could live for 20 or 30 years after you stop working, so you need to make sure your pension can last the course.”
To enjoy the minimum retirement living standard, a single person needs £10,900 a year, while a couple needs £16,700, according to research by Loughborough University.
These figures rise to £20,800 and £36,000 for a moderate retirement living standard, or £33,600 and £49,700 for something more comfortable.
How much you need will vary depending on where you live and what financial responsibilities you have.
Hampton suggests tallying up all your retirement pensions and savings, and other sources of income such as a rental property or part-time job, then setting this against your living expenses. These may include mortgage or rent, debt repayments, one-off spending such as home improvements or holidays.
You can do this in five minutes using an online retirement income calculator such as the one on Government guidance site MoneyHelper.org.uk.
Hampton said pensioners often spend more in the early years of retirement when they are relatively fit and healthy. “Spending then falls but may pick up in later life, due to care needs or assisted living.”
Retirement is no longer the end of the road for investing. “Your pension is going to have a better chance of growing if it remains invested, rather than sitting in your current account earning next to no interest,” he said.
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For savings and investments outside of pension, use your £20,000 tax-free Isa allowance where possible, Hampton advised. “Higher risk investments may achieve higher returns but as you get older, you should take fewer risks as you have less time to recover from, say, a market crash.”
Clive Bolton, managing director of savings and retirement at LV=, said we all have big decisions to make as we approach the end of our working lives.
“Should you drawdown your pension in one go or over a period of time? Should you take your 25 per cent tax-free cash or leave it to grow? Should you buy an annuity to guarantee an income for life or go for drawdown?”
These are complicated questions and it may be worth taking independent financial advice,” he said.
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