People save for their retirement for the bulk of their working lives so ensuring they have enough money to fund a suitable lifestyle at the end of all that is critical. The changes announced last year have made this even more the case by extending the options people have for their retirement savings.
Chancellor George Osborne’s changes to the pension system are designed to offer retirees more freedom in how they use their pension pots, but with this has come a greater sense of responsibility when it comes to making sure the bills can be paid and post-retirement dreams achieved.
Last year, a survey of more than 2,000 defined contribution (DC) pension scheme members by Barclays found 93 per cent agree that individuals should bear the responsibility for ensuring they have enough money to live on in retirement.
Jonathan Parker, head of investment proposition at Barclays Corporate & Employer Solutions, said: “It is vitally important people fully understand what their financial situation will look like in later life and what they have to do now to ensure they are able to achieve a standard of living they want for retirement.”
This doesn’t mean they see themselves as being on their own as most want more guidance and support in preparing for retirement, but it does the highlight that we are now expected to be more proactive in getting ready for this stage of life.
Chase de Vere’s Patrick Connolly (pictured) argues that not enough people are focusing on the fact that their retirement is even more in their own hands.
“I don’t think enough people are aware of this increased responsibility but that sentiment is changing. In the past many people have thought they could rely on the state or their employer if they have final salary pension schemes and not have to take responsibility for themselves,” he said.
“People are becoming aware of it but they have to do more and, in general, are leaving it too late. Many people are understandably focused on paying off debts before saving for retirement but too many focus on things like buying a new car or having an extra holiday, rather than paying into a pension. At some point, that attitude has to change.”
The Barclays report also found investors believe £17,500 is the annual income needed for a relatively modest but comfortable lifestyle in retirement. While this wouldn’t fund a series of six-month luxury cruises around the globe, respondents said the sum would allow them to not worry about making ends meet or face a painful drop in living standards.
According to the survey, the top three priorities for a desirable retirement - after essential living costs - are being able to pay off money owed, taking an annual two-week holiday abroad and running a car. These expectations are relatively modest when compared with the commonly held view that people will seek leisure and luxury in their retirement.
So a lot of people are aiming for an income of £17,500 in retirement, but how do they get there? Over the coming weeks, FE Trustnet will be running a number of series looking at the various issues investors need to contend with when turning that pile of pensions cash into an income stream.
Once upon a time, this was relatively simple. An investor would spent the bulk of their time in the growth phase, focusing the vast majority of their portfolio on equities, before gradually moving down the risk spectrum as they approach their retirement date until they were holding cash. This would then be used to purchase an annuity, which would take care of providing the income.
The pension reforms have changed all this. Although retirees can still buy an annuity they are no longer required to and can take their pension pot however they want, subject to their marginal rate of income tax in that year - meaning they can buy an annuity or Lamborghini or, indeed, investment funds that offer a growing, sustainable income stream.
It’s this last option that we’ll be focusing on over the coming weeks, through two series and a few other standalone articles.
One thing we’ll be paying close attention to the funds that might be appropriate for the income investor in retirement, looking for products that distribute dividends frequently with less downside risk than their peers. While investors might not want to restrict themselves to these kind of funds, they may be a good starting point for those soon to retire.
We’ll also be looking at examples of portfolios investors can craft for income in retirement, asking the experts for suggestions on the funds investors of different risk profiles should be looking at as well as more specialised briefs such as passive funds and investment trusts.
Connolly added: “Pre and post-retirement strategies have changed and are changing completely. Gone are the days when you had to be aggressive when young then take less and less risk as approaching retirement and when you get there you’re pretty much in cash and fixed interest.”
“Going forwards, many people will still need to be invested throughout retirement - which could last three decades or more. Being in cash and fixed interest would mean people are likely losing money after inflation so the whole pre and post-retirement outlook has changed.”
“There isn’t a one-size fits all approach and what people will need is independent financial advice, as it’s very much on a case-by-case basis accounting for how you plan to take pension benefits and what assets you have available.”
Of course, we’re keen to write what you want to read. If there’s any retirement income topics you would like to see covered over the next few weeks feel free to comment below or drop us a line on editorial@financialexpress.net and we’ll see what we can do.