The financial realities of getting older
Life is full of challenges and possibly the single biggest challenge of longer life expectancy is working out how to finance it. There are more options than “just” pensions and even if you do go down the pension route (which is often a very sensible approach), there can be all kinds of considerations involved in choosing exactly the right approach to pension saving. Here is a quick guide to your main options for retirement saving.
Option 1 – Review your view of retirement
Although this is presented as an option, it’s debatable just how optional it will be for most people. The simple fact of the matter is that if you are living longer then you will need more money to see you through your whole life. This means that you will either have to work longer or save more money during your early life to pay for your later one.
In the real world, however, the latter option is only available to people who earn enough to be able to meet all their needs in the present (and ideally at least some of their wants as well) and still be able to save enough to have an extended “full” retirement (i.e. a retirement in which they do not have to work at all).
Option 2 – Consider “non-pension” options
You can save for your old age/retirement by any means you like, for example by building up savings and by creating an investment portfolio (of shares, property or both). These days, you may also have the option of opening a Lifetime ISA in which to save towards your retirement. Like all financial products, Lifetime ISAs have their own unique characteristics, their advantages and disadvantages. In other words, they may be great products for some people and terrible products for others. It is therefore strongly recommended to get professional advice before deciding whether or not they’re right for you or at the very least to inform yourself thoroughly about what they are, how they work and what they could mean in practice for you.
Option 3 – Pensions
If you qualify for the auto-enrolment scheme then it is certainly worth considering as your employer has to make contributions into the scheme and these can provide a meaningful boost to your pension savings. If you do not qualify for the auto-enrolment scheme, then saving via a recognised pension scheme can still have benefits since, within limits, pensions contributions can be made out of pre-tax income.
It is even possible for those earning an income (from employment or self-employment) to make pension contributions on behalf of a spouse/civil partner and claim tax relief on those contributions (again, within limits).
Prior to the introduction of “pensions freedoms”, the downside of pension savings was that the majority of any pension pot ultimately had to be used to buy an annuity. While this was “safe” in the sense that it provided an income for life, that income was not necessarily at the sort of level savers would have liked, especially if they had larger pension pots and were comfortable with the idea of handling investments.
Now, however, not only are pensions savers free from the requirement to use the majority of their pension pot to buy an annuity, but they can even pass on their pension pot after they die. This can open up all kinds of interesting and exciting opportunities, however, it does still need to be remembered that the main purpose of retirement savings is exactly what the name suggests, i.e. to provide an income in retirement, any other considerations (such as the desire to leave a legacy) should be subordinate to that main goal.
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