Retirement Pillars: how to diversify your retirement savings

‘My house is my pension’

‘My business is my pension’

‘I will get full State Pension’

‘I am enrolled in a work pension scheme’

These are some common statements we hear regarding retirement planning. Previous generations relied on guaranteed work pensions, well-funded Social Security benefits and increasing property prices. It’s worth remembering that life expectancy was lower at this time, and some might argue that cost of living was reasonable.  Equally, there was great sense of urgency and people thought that if you invest wisely in property, or saved enough, you would be fine.

The retirement scene has changed drastically in the last couple of decades, such that relying on just your house or savings account might not be enough to support your retirement years. A smart strategy could be to diversify into various options to achieve your required income.

Various pillars in retirement can come in different forms, as shown in the diagram above.

1. Business – Self-employed people might rely on robust succession planning or the sale of business alone and this might sometimes work. However, exploring other options such as pensions can not only provide overall tax benefits but also provide long term growth in a tax efficient environment.
2. Savings and Investments – Most of us have been advised by our parents to save for the rainy day. Savings provides security from market volatility and can be very useful in periods of financial stress. Investments on the other hand can grow exponentially depending on your risk profile and asset allocation, especially in the longer term.
3. Property – Property prices usually go up with time and can provide useful rental income. Building a portfolio of buy to lets is a common strategy to build a retirement pot. However, there have been some tax changes recently that have reduced the net yield for BTL investments.
4. Personal Pensions – Thanks to auto enrolment, a lot of employees are now receiving pension contributions. There are some very lucrative tax benefits to be had in contributing to your pension to build retirement savings. Pensions can not only help you grow your retirement funds in a tax efficient manner, but they can be used in smart inheritance tax planning.
5. State Pension – The full new State Pension (SP) is £175.20 per week. What you receive is based on your National Insurance record. You’ll usually need at least 10 qualifying years to get any State Pension.

Department for Work and Pensions understand the increasing burden on the State to guarantee State Pension, hence it’s regularly reviewed to make sure that it’s affordable and fair. People are living longer and spending a larger proportion of their adult life in retirement than they were in the past.

When the State Pension was introduced in 1948, a 65-year-old could expect to spend 13.5 years in receipt of it – around 23% of their adult life. This has been increasing ever since. In 2017, a 65-year-old can now expect to live for another 22.8 years, or 33.6% of their adult life. Under the current law, the State Pension age is due to increase to 68 between 2044 and 2046.

It’s no surprise that you might have to wait a longer to get your hands on your State pension and even if you receive  full SP (circa £9,000 p.a.), it might not be enough to meet your lifestyle. There is a lot of encouragement and benefits to build your retirement savings by the Government, which can provide invaluable freedom from financial worries in the future.

Building a retirement pot does not necessarily mean tightening your disposable income, but it does require you to be strategic and consistent in the longer term, the core tenets of financial planning.

If you would like to speak to Josh about Retirement Planning or contact our team about any area of financial planning, please contact us at 02106 321045 or josh@fiduciawealth.co.uk