This content is for information and educational purposes only. It should not be taken as financial advice or investment advice. To receive tailored, regulated financial advice regarding your affairs please consult us here at Hanson Financial Services (financial advice in Liverpool).
Many of us think about children when we hear the word poverty – unable to afford good clothes, school supplies or nice toys. Yet poverty also includes over-65s unable to meet their essential living costs. Over the last 10 years, this “pensioner poverty” has been steadily rising, with the government noting a 5% increase since 2012. Rates are higher in many non-white retirees and for those who rent their homes.
In this article, our team at Hanson Financial Services (financial advice in Liverpool) explores some of the key reasons why people fall into pensioner poverty, suggesting ideas for individuals to reduce their own risk of running out of money in retirement.
For those still in their careers and renting, it is important to consider how you will pay for shelter in retirement. Whilst renting throughout a lifetime can be a good choice for some people, it will likely require more retirement savings. A homeowner, by retirement, will likely finish paying off their mortgage and, therefore, have significantly lower expenses compared to someone who is still renting for the next 10, 20 or 30 years.
Your landlord could also put your rent up to cover their own rising costs – putting extra pressure on your savings. Whilst it is not the right course for everyone, most will find it easier to build their savings for a comfortable retirement if they own their home outright. In some cases (e.g. those approaching their retirement date), this might mean considering downsizing, equity release or moving to a cheaper area to make your living costs more manageable.
State pension shortfalls
One charity suggests that as many as one-fifth of UK pensioners are currently living in poverty. Overall, people also rely heavily on the state pension for their retirement income – comprising as much as £6 out of every £10 received by over-65s. Even for higher earners, the state pension is likely to form a crucial pillar in a retired person’s overall income. For this reason, it is important to ensure that you get the best state pension deal with good forward planning.
In 2021-22, you need at least 35 “qualifying years” of National Insurance contributions (NICs) on your record to get the most state pension. At the time of writing, the full new state pension is £179.60 per week – i.e. £9,339.20 for the year. Given that you are likely to need at least £18,000 per year to cover essential costs in retirement, the state pension could cover around half of this amount. Moreover, the state pension pays out indefinitely until you die, and it rises each year under the “triple lock” system to keep up with the cost of living. So it is crucial to maximise.
There are different strategies available to people who are not set to build up a complete record of 35 years. One is to consider making voluntary NICs to fill “gaps” (i.e. years when you did not contribute enough to qualify them as “complete”). Another might be to defer claiming your state pension so that you can increase the income you will receive across your retirement.
The cost of care
The cost of long term care is often overlooked by people thinking about how much they need for retirement. Yet it has the potential to seriously erode your finances without a plan. In England, the typical hourly rate for a carer to visit your home is £20. If you need to go into a care home, however, then costs could exceed £840 a week for a room in a nursing home.
You are not entitled to financial support from the local government if you own your own home and/or you have savings over £23,250. The average stay in a care home is about 2 years, so it is worth factoring in this potential cost into your retirement savings. Certainly, you will need your own savings in addition to your full state pension. Bear in mind that, without additional savings, you may have to sell your main home (unless your spouse lives there).
Personal savings plans
Even setting aside the possibility of needing to pay for your care, the state pension alone is not likely to cover all of your daily expenses in retirement. You will need your own investments and savings too. These might include:
- ISA savings and investments.
- Workplace pension pots.
- Final salary / defined benefit pension schemes from your employer.
- Investments in a general investment account (GIA).
How much you will need in any of these will depend on your own circumstances and financial goals for retirement. If you want a more exuberant lifestyle, for instance, then you are likely to need more invested to cover your higher expenses. Those looking to live modestly should not require as much, but will still need a healthy contribution rate to ensure a big enough pot.
Conclusion & invitation
Are you interested in talking to a financial adviser about your pension and investment planning needs? We’d love to assist you here at Hanson Financial Services.
Please contact us to arrange a consultation with our team – free and without obligation – to gain more clarity and peace of mind over your financial plan.
You can call us on:
Liverpool Office: 0151 708 7616
Manchester Office: 0161 401 0991
Chester Office: 01244 960 039Or email via: [email protected]