No-one knows exactly how long they are going to live for, and it can be really worrying to think about the possibility of your pension running out during your retirement.
With life expectancy rising, however, ending up with insufficient funds later on in life could be a real possibility for many people reaching retirement age in the next few years.
With this in mind, it’s a good idea to take stock of your financial situation sooner rather than later, and consider ways that you might be able to make your pension last longer.
Remember however, that there’s no one-size-fits-answer when it comes to financial planning like this, and if you’re unsure how to proceed, your best bet is to take your own personal circumstances into account and seek personalised pension advice.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
Here are a few ways that you might be able to get more out of your pension.
Budgeting for retirement
One aspect of retirement that can be difficult to get used to is the shift in your budget when you retire or reduce your working hours. Figuring out how much to take out from your pension each year to support yourself comfortably while still leaving enough for your future is a delicate balance, and you may find you need to adapt aspects of your spending in order to accommodate the change in income.
Two important steps in preparing your retirement budget are calculating how much you’ll be able to take from your pension each year to meet the standard of living that you want. If you are careful about how much you withdraw, you can hopefully make your savings last that bit longer.
Calculating your pension
Firstly, you should work out how much your pension is worth and roughly how much you’ll be able to take from it each year. You should be able to find the current value of your pension savings on your annual pension statement. Learn more about pension statements in our guide Your annual pension statement explained.
You can use the Rest Less pension calculator to see a forecast of the pension income you’re likely to get when you retire, based on the current value of your retirement savings. This can include your State Pension entitlement if you want it to, and you can also see the impact of taking 25% of your pension as tax-free cash. The calculator enables you to amend your retirement age and the level of income you want as well, to see how these affect the length of time your pension will last.
Find out more about some of the factors that can affect the longevity of your pension in our article How long will my pension last?
How much will you need?
According to the Pension and Lifetime Savings Association’s Retirement Living Standards, you would need £12,800 a year to have a “minimum” standard of living in retirement rising to £23,300 for a “moderate” standard and £37,300 for a “comfortable” living standard (for couples, these numbers stand at £19,900, £34,000 and £54,500 respectively). Of course, these numbers will vary quite a bit between different people who will have different circumstances and ideas of what constitutes different standards of living, but the data can still be a useful guideline to help you plan your retirement budget. Find out more in our article £12,800 annual income now needed to retire, say pension experts.
Our guides Can you afford to retire? and How much should I save for retirement? contain more information and useful questions to ask yourself when calculating your retirement budget.
Saving money in retirement
Particularly with the cost of living so high at the moment, the more you can do to cut down your regular outgoings, the longer your pension will last you as you enter retirement.
Our Ways to save money section contains a wealth of useful articles on reducing your bills, such as Seven ways to save on your household bills, 12 ways to save on car and travel costs and 11 thrifty tips to save money on your shopping.
Maximising your State Pension
You can’t extend the term of your State Pension payments, since you receive them until you die. However, if your private pension starts to diminish or your financial circumstances change, you may find yourself relying more on the State Pension later on in life. With that in mind, it’s worth understanding how you can boost the payments you receive.
Buy any missing National Insurance qualifying years
Your State Pension payments are calculated based on the number of years of National Insurance contributions you have – you will usually have these for each year you were a paid employee or claiming certain benefits (child benefits, Jobseeker’s Allowance, Employment and Support Allowance or Carer’s Allowance). You need to have a minimum of 10 years of credits or contributions to qualify for the minimum State Pension, and 35 years to claim the maximum amount (£203.85 in the current 2023/24 tax year) – if you have an amount of years between 10 and 35, your State Pension entitlement is calculated on a sliding scale.
If you are missing any qualifying years, you can buy up to 10 years contributions to fill out your record and increase your State Pension entitlement. These are known as ‘voluntary class 3 NI contributions’, and the cost is £17.45 per missing week (or £907.40 a year). Buying one year will boost your State Pension by around £302 a year.
This means that it would take just over three years of State Pension payments for you to make back the cost of buying more qualifying years, so it can be a very worthwhile move in the long run. Of course, you will have to consider whether you can afford the hefty upfront cost of buying more years. Additionally, be aware that you can usually only make up gaps from within the previous six years, and you may need to pay a higher rate for gaps from over two years ago.
You can learn more about this process in our articles Is it worth paying to top up your State Pension? and How the State Pension works.
Consider deferring for higher payments
Another way to boost the value of your State Pension payments is to defer when you start receiving them. This may be possible, for example, if you’re planning to continue working part or full time past State retirement age, so you’ll have other income to rely on.
You don’t start getting the State Pension automatically – you’ll receive a letter from the Government two weeks before you become eligible, and you can opt to either start claiming or defer it (or do nothing, which will also mean you defer it).
For every nine weeks that you defer the State Pension, your weekly payments will increase by 1%, which equates to about 5.8% for a year of deferral.
However, even with the boost from deferring, it would still take you just over 17 years of increased payments to earn back the money you missed out on by deferring just one year (ignoring inflation). The average life expectancy for both men and women means that this is still, on average, a worthwhile decision – and the increased payments may be especially valuable to you when you are older – but you should be careful about taking this decision and understand how long it will take for it to be worthwhile.
You can read more about the pros and cons of State Pension deferral in our article Deferring State Pension – How much can I get and is it worth it?
Making extra contributions
Paying extra money into your workplace pension can be really rewarding in the long run if you can afford to do so.
The main reason is pension tax relief – this is a system where, when you make a pension contribution, the government “chips in” with some of the money that you would have paid in tax.
For example, a basic-rate taxpayer receives 20% pension tax relief, meaning that they would only have to contribute £80 to their pension to receive £100, with the government making up the remaining £20. Higher rate taxpayers receive 40% pension tax relief, and additional rate taxpayers receive 45%, so they would only need to pay £60 or £55 respectively to contribute £100 to their pensions.
You’ll receive tax relief on up to a certain amount of pension contributions each tax year, known as your Annual Allowance. For the 2023/24 tax year, the Annual Allowance is £60,000. Read more in our articles How do pension allowances work? and How pension tax relief works.
If you pay into a workplace pension scheme, then you will also usually benefit from employer contributions to your pension. Depending on how your workplace pension is set up, your employer might pay more into your pension too when you increase your contributions, so it’s well worth checking this if you’re considering paying more in.
Buying an annuity
Whilst buying an annuity with your retirement savings won’t boost the amount of income you receive, it will provide you with a consistent, guaranteed income for the rest of your life, so you’ll know exactly how much you have coming in each month.
With an annuity, you essentially use some or all of your pension pot to buy a fixed income to be paid to you for the rest of your life (or a fixed term).
The amount of income from an annuity you’ll get will depend on how much you can pay for it, your age and health, whether you want the income to increase each year, and whether you want the annuity to pay out to someone else after you die.
The main advantage annuities have over pension drawdown is that you can guarantee a fixed income for the rest of your life, so you won’t have to worry about running out of money.
However, bear in mind that your annuity will not automatically pass into your estate when you die unless you specifically make provisions to pass it on when you buy it.
If you are interested in using your pension to buy an annuity and want to learn more about the various pros and cons, you can read our article Annuities explained.
Staying in the workforce or phasing your retirement
One increasingly common option for those worried about their pension lasting them through retirement is to defer retiring altogether and to continue working either full or part-time for a few years. It has even become quite common for retirees to ‘unretire’ and return to the workforce.
The advantages and disadvantages here probably need little explaining. On the one hand, you’ll be continuing to earn money and potentially keep paying into your pension without needing to take an income from it, or if you are working part-time, taking less from it than if you were fully retired. This means that your pension will stay healthy for longer, and you’ll have a bit more to get on with when you fully retire.
On the other hand, you will be staying in the workforce longer than you may have planned and shortening your retirement overall – there’s no getting around the fact that this can be a difficult or disappointing decision for some to have to make.
One option could be to “phase” your retirement, where you stay working, but gradually reduce your hours over time. You can read more about this option in our article How can I phase my retirement?
Meanwhile, our article Is going back to work after retirement the right move for me? contains guidance and questions to ask yourself if you have retired already and are thinking about returning to work.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
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