There’s no doubt that recent events will take their toll on all our finances in one way or another. But for those nearing or in retirement, it may have a bigger impact than most. With pension funds hit by the recent market crash, and the global economic outlook increasingly uncertain, retirees might find themselves relying on more than just their pension savings to finance their retirement.
This isn’t a new problem. Even before the coronavirus crisis struck, our ‘What’s your Number’ research[i] found that 55% of people were unsure if they will have the money they need to live their chosen life in retirement. As a result, 14% are expecting to continue working, while 18% will rely on money tied up in their homes – either through equity release or downsizing. Our 2018 ‘Generation Game’ report[ii] even found that 12% of people are counting on an inheritance to fund their retirement. So, for those facing this predicament, what are some viable alternative sources of income, and what are the key factors you need to consider?
The State Pension
It would be wrong to dismiss the value of the State Pension when planning for your retirement – it’s worth more than many people give it credit for. If you were born before 6 April 1951 for a man, and 6 April 1953 for a woman, and you qualify for the full State Pension, you will receive £6,980.48 a year (tax year 2020/21). This is guaranteed to grow by at least 2.5% each year. To put that into context, you would need approximately £134,000 of pension savings to generate an equivalent income from an annuity, and even more if you also want it to rise with inflation every year. The amount of State Pension you receive will depend on several factors including your age, gender and the amount of National Insurance contributions you have made. To find out how much you might receive, visit www.gov.uk/check-state-pension.
Continuing in employment
According to the latest figures published by the Office for National Statistics (ONS)[iii], 11% of over 65s are still in some sort of employment. This figure has doubled in only 18 years, and if this trend continues it’s likely that at least a fifth of today’s 45-year olds will be working well into their retirement years. Relying on paid work as you get older can be a risky strategy though. You are more likely to suddenly become unfit to work, and you may also fall victim to a rapidly changing job market – especially considering the impact this crisis might have on the global economy. If you plan to work in retirement for financial reasons, it’s best to consider this as a way of paying for additional extras, not as a financial necessity.
Property rental income
Renting out property can provide a valuable income in retirement, but your funds are relatively illiquid in that you can’t access them quickly. You should also remember that while rental income can be quite stable, it is not guaranteed. You should account for times when the property is vacant, and for any large unexpected associated expenses. Rental income is also taxable if you earn more than £2,500 in rent per year, after allowable expenses (such as wear and tear repairs). For more details, visit https://www.gov.uk/renting-out-a-property/paying-tax.
An alternative is to rent your property for short-term holiday lets through companies such as Airbnb or Homeaway. If you rent out the whole property, it will be subject to the same tax rules as above. However, if you let a room in your home on a short-term basis, you can receive up to £7,500 per year in rent without paying income tax.
ISAs and other savings
You can now save up to £20,000 a year into an ISA, and any investment returns you receive are free from capital gains tax. If you have been saving your ISA allowance each year, you might be well advised to use those savings as an income in retirement before you start drawing a pension. The reason is that pension savings can be free from inheritance tax, although there are situations where this is not the case, so you should check with an adviser.
Stocks and Shares
If you have directly invested in stocks and shares, you could consider any dividend payments as another source of income. However, the annual dividend tax allowance is now only £2,000 per annum, so anything above that will be taxed at your normal band rate of income tax. In the current economic climate, you may also find that dividends dry up until the economy improves.
Equity release was once seen as the product of last resort for people who found themselves in financial difficulty in retirement. Nowadays it is increasing in popularity as more and more people seek to take advantage of the equity that has built up in their home. It’s a bit like taking out a loan, and the interest rates are far more competitive than they used to be. There is also protection in place to ensure clients and their families are well protected from negative equity, and they will never end up owing money. Using what is likely to be one of your biggest assets to enjoy your retirement years, while staying in the family home, is a viable option – especially since the money you release from your property is tax free. It will, however, almost certainly mean your beneficiaries will receive less of an inheritance when you die.
The benefit of holistic financial planning for retirement
If you are considering different income streams in retirement, then it’s important to seek professional financial advice. Taking a holistic approach to retirement income can help ensure you minimise your annual tax liability by accessing that income in the right order and ensuring you don’t withdraw more than you need each year. It can also help with your estate planning, meaning you could ultimately leave more to your beneficiaries by taking advantage of current IHT rules. A professional adviser can ensure your savings are invested appropriately for your lifestyle and your attitude to risk – both of which are likely to vary as you grow older and your circumstances change.
In light of the current crisis, it would be prudent to seek advice sooner rather than later.
The source of the research findings in this article is our “What’s Your Number?” report. To read the report, please visit www.sanlam.co.uk/whats-your-number.
The information and opinion contained in this article should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any expressions of opinion are subject to change without notice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.