Sponsored content by Nick Browning and Martin Murray, senior wealth advisers at Alexforbes
THIS year has been marked by significant upheavals in both UK government and markets with the FTSE 100 trading between 6707.62 and 7687.27** and three prime ministers since 6 September. Therefore, the time is now for calm, a little stability and certainty, if not security, of retirement income?
We all face certain costs that do not go away and generally rise with inflation. These include rent, transport, utility bills and food… if the boats sail, that is. The reality is that most of us have seen our retirement pots shrink over the course of the year and may now start to be concerned about how this may impact our future retirement plans.
During the past decade when interest rates were low (the Bank of England rate was as low as 0.10% in March 2020), the traditional retirement solution of an annuity was all but forgotten. Yes, you may not have heard that term for a long while. An annuity provides a set income for life through an insurance company. You give away the capital in return for a secure income.
As interest rates have sharply risen, annuity rates have reached a 14-year high, increasing by as much as 52% in the nine months to 5 October*. So does this mean it is time to revisit a dependable old friend?
At the time of writing, a 65-year-old individual (irrespective of gender) with a pension pot of £100,000 could attain a fixed income guaranteed to be paid for at least ten years but payable for their life only of £589.70 a month (£7,076.40 per annum). To ensure that their spouse or partner received an income upon their demise, the starting level of income would reduce to £6,651,72 per annum and after their demise, their partner would continue to receive £3,325.86 a year for life.***
(This example assumes no increases in the annuity payment and that the spouse/partner is no more than three years younger than the annuitant. Warning: Inflation may erode the value of the income provided over time.)
Therefore, while our dependable old friend, the annuity, may not solve all your retirement needs, it does secure an income stream (alongside your state pension) to meet some of those non-discretionary costs. Staggering this decision or running an annuity alongside your existing pension pot could provide both future potential growth and flexibility. This is a useful (and certain) piece of the retirement income jigsaw… a little bit like the initial build of a puzzle from the outside borders in. But what if you are still some way away from retirement and yet to think about what your retirement will look like?
According to a recent survey by Perspectus Global commissioned by Unbiased during April 2022, three quarters of those aged 50 and over are worried about how the cost of living will impact their retirement. Our experience points to a similar picture in Jersey and thousands of Islanders are ill-prepared for their retirement. Alexforbes recommends target levels of savings at various stages of the retirement journey. This hinges on saving early and harnessing the power of compounding over the long term. A starting point would be targeting 50-60% of your final full-time earnings in employment as your level of retirement income, to provide a comfortable but not lavish retirement.
Begin by asking yourself a simple question: ‘If I retired today, how much income would I need?’ If the answer is £30,000 per annum, how are you going to achieve it? Don’t forget that if you have paid sufficient years of social security contributions, you will receive the full-rate Jersey old-age pension of, currently, £253.40 per week (£13,176.80 per annum). In our example, this will leave a shortfall of approximately £17,000 per annum. Also please bear in mind that £30,000 today will need to be adjusted for inflation so that £30,00 figure could be much higher in a few years’ time.
Looking at current annuity rates, the same 65-year-old referenced earlier would need £245,000 to buy an annuity to provide £17,000 per annum. This sounds a lot but if you are in an employer-sponsored scheme, don’t forget that your employer will be making contributions to help you accumulate your retirement pot. If you have the opportunity to join your workplace pension scheme, then don’t delay and maximise your and your employer’s contributions as is this is often the most cost-effective and efficient route to saving for retirement.
Alternatively, a Retirement Trust Scheme (a personal pension) allows you to accumulate funds over time and then provides a variable income with the benefit that, upon your death, the remaining fund can pass to your beneficiaries (tax-free if you haven’t taken any benefits or less a 10% tax charge if you have commenced benefits such as tax-free cash and/or income).
Of course, everyone is different, and you may also have other sources of income or assets to rely on in retirement, such as a rental property, an investment portfolio or a potential inheritance. If you have some, or none of these, with the falling investment markets and continuing high inflation, the onus is even more on us as individuals to save more for our retirement.
The first step is to take action and speak to a financial adviser who will take time to understand your current financial situation and consider your Jersey pension entitlement, current pensions (company and personal), investments and provide you with a retirement tax-free cash and income forecast.
Whatever your age, you’re never too young or old to take action to ensure you have the retirement you want. If you need our help to guide you on your retirement planning journey, please contact us on email@example.com.
* Google Finance
** FT Adviser 5th October 2022
*** Aviva quotes 7/11/2022