The UK’s State Pension may be increasing by around 8 per-cent this April – but it’s still well below the level enjoyed by retirees across much of Europe. In fact, according to Almond Financial, the UK’s State Pension ranks at just 16th in a league table of European countries.
The full State Pension will increase in April from £203.85 per week to £221.20 a week. That’s about $378 CAD or $281 USD. But not everyone retiring in the UK gets the full amount – it’s dependant on people making 35 years of National Insurance Contributions (NICs) during their working life.
The UK’s Pension Lifetime and Savings Association estimates that retirees need at least £246 per week to enjoy even a minimum living standard – and that doesn’t factor in rent or mortgage costs. That’s why many people retiring this year will be looking at ways to boost their State Pension income.
Their first point of call could be government support. Over a million retirees are eligible for some form of additional state assistance, such as Pension Credit. This is a means-tested benefit that in itself is valuable, but that opens up eligibility to other benefits such as support for housing costs. In total, eligibility can be worth around £3,500 per year.
Thankfully, most people of working age in the UK are saving into some form of personal pension scheme. New ‘auto enrolment’ rules came into play in 2012. This now requires all employers to enrol eligible employees into a workplace pension, and to make contributions to their pension savings. It also means employees automatically pay into their pension from the earnings, unless they chose to opt out.
Most UK modern workplace pension schemes are of the ‘defined contribution’ type (also known as a ‘money purchase’ schemes). Workers build up savings - known as a ‘pension pot’ - and have options when it comes to turning these into income. They can do this from age 55 (changing to age 57 in 2026) but are also free to wait until they retire, or even later, building up greater savings in the meantime.
Their options include ensuring a guaranteed, regular income with an annuity, either for life or a fixed term. Annuity rates offered by product providers are near record levels at the moment, so annuities are more popular than for some years. Consumers can use online annuity calculators to get an indication of how much income their pension pot will buy.
Annuities have the benefit of guaranteed income, unaffected by changes in interest rates or investment performance. An alternative is flexi-access drawdown where a person’s pension savings remain invested. This creates the opportunity to benefit from investment growth, but the risk of suffering if markets dip. This option also offers more flexibility than an annuity, as retirees can take withdrawals from their pension savings whenever they want – until their money runs out of course.
Retirees can choose one of these options or blend them for a mix of guaranteed and investment-driven income. Help is at hand to make the right choice, such as from the free government-backed Pension Wise service or financial advisers.
Another way to add much-needed cash to supplement either State or personal pension income include drawing on savings or investments. Rising interest rates in recent years has been good news for millions of UK savers. Also, in a bid to encourage more consumer saving, the government typically lets savers enjoy the first £1,000 of interest earned on savings tax-free.
But drawing money from savings isn’t an option for many retirees. Millions are ‘asset rich, cash poor’: they own a property but have little in the way of savings or investments. To turn their property equity into cash, many retirees downsize to a smaller property or one in a less expensive neighbourhood. Others turn to equity release, initially using an equity release calculator to see how much cash they can release in the form of a lifetime mortgage (reverse mortgage).
So, despite the UK’s relatively low State Pension - at least compared to similarly affluent European neighbours – the future isn’t necessarily bleak for all of its retirees. With a number of ways to ramp up their retirement income, and with careful planning in their working life, they can enjoy a more comfortable retirement than would otherwise be possible.
Please do remember that this article is for informational purposes only and does not constitute financial advice. Take professional advice or guidance before making important decisions about your retirement income.
Name: Craig Slater
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Organization: Retirement Line Limited
Address: 52 Forder Way, Hampton, Peterborough, PE7 8JB, England, United Kingdom
Phone: 01733 973 038
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