The 2021 Great British Retirement Survey from interactive investor was published recently. Using more than 10,000 responses to 100 questions spanning coronavirus, taxation, attitudes to risk, and the rise of ethical and sustainable investing, the survey built a picture of modern retirement.
One of the most important jobs we can do as financial advisors is to help you to understand where your income in retirement will come from and help you to manage these different income streams effectively.
Here’s what the Great British Retirement Survey had to say about the sources of your income and what they mean for your retirement.
Most of your income will come from 3 types of pensions you might hold
1. A defined benefit (DB) pension scheme
According to the interactive investment survey, more than half (51%) of current UK retirees see a defined benefit (or “final salary”) scheme linked to their occupation as their main source of retirement income.
Of those yet to retire, only 38% expect to be mainly reliant on a DB scheme.
Source: interactive investor
DB schemes are often thought of as the “gold standard” in retirement. You receive a regular income, often with generous benefits attached. Not only that, but the amounts payable under DB schemes are often more generous than the defined contribution (DC) pension schemes that have begun to replace them.
The amount of pension you receive is based on:
- Your years of service
- Your final salary at retirement, or your average salary
- An accrual rate of typically 1/60th or 1/80th (a fraction of your pensionable pay in each year of employment).
Many DB schemes will increase each year to help combat the effects of inflation and they could provide a pension for your spouse on death. Tax-free cash may also be payable.
If you have a DB scheme, it might seem inflexible compared to the DC plans you hold, but using a mixture of flexible and regular annuity options could be a fantastic way to manage expenditure in retirement.
2. A defined contribution (DC) pension scheme
The generous benefits on offer from DB schemes, and the costs attached, have seen them fall out of favour with employers as many larger schemes opt for DC plans.
This might account for the difference between retirees and those yet to retire, with 51% and just 38%, respectively, seeing DB schemes as their main source of retirement income.
Your pension in a DC scheme is based on the contributions you make. You pay into the plan each month to build a pension pot and this pot is used to “buy” an income in retirement.
You can use Pension Freedoms to take DC plans in a flexible way, which makes them great for covering discretionary expenditure, but only if you have a regular income coming in from elsewhere to cover fixed monthly costs and you keep a close eye on your budget.
3. Your State Pension
The State Pension is unlikely to be your main source of retirement income, but it is worth considering. It can make a great base on which to build the rest of your retirement plans, and the regular payments mean your State Pension could be perfect for paying, in full or in part, your regular fixed expenses.
The full new State Pension entitlement for 2021/22 is £179.60 a week, or £9,339.20 a year. For 2022/23, the full entitlement is £185.20 a week, which totals £9,630 a year.
To claim this amount, you’ll need to have 35 “qualifying years” of National Insurance contributions (NICs). If you have less than 10 qualifying years you usually won’t receive a State Pension at all.
You can check your National Insurance record and it might be possible to make additional contributions to fill any gaps that exist.
Some of your income will come from other investments you hold
The Great British Retirement Survey found that around two-thirds of retirement income will come from the pensions you hold. But you might have other investments that will complement your pension income.
Source: interactive investor
ISAs and investments make up the majority of the remaining sources of retirement income for those already retired and those yet to finish work.
You’ll need to think about how and when you access non-pension savings and investments, and how these withdrawals fit into your overall plan.
You might find that a combination of lump sums and regular withdrawals works best. We can help you keep an eye on your pensions and investments to ensure the withdrawals you make are timely and tax-efficient and that they continue to provide you with your desired lifestyle throughout retirement.
Get in touch
Managing your pension withdrawals and the other retirement income that will supplement it isn’t easy. That’s why we are here to help. Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
