How to achieve financial stability in retirement

Brian McGleenon
Updated

Pensioner poverty is increasing, with more than one-third of UK adults expressing concerns about facing financial difficulties in retirement, according to a Scottish Widows survey.

But there are essential steps you can take to make yourself more financially secure in your later years.

On this week's episode of Yahoo Finance Future Focus, Scottish Widows head of policy, pensions, and investments Peter Glancy shares insights on what people can do at various points in their working lives to achieve financial stability in retirement.

Scottish Widows conducts an annual survey of 6,000 people to assess their retirement preparations to create their National Retirement Forecast, which predicts who is on track for a comfortable retirement and who may face financial struggles.

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"What we're finding at the moment is that around 32% of the population are on track to have a comfortable retirement," Glancy says.

However, "38% of the population are telling us that the position they will be in is going to really give them some challenging times financially when they come to retire," he adds.

For many in the UK, the state pension will play a significant role in their retirement income. "Sixty per cent of us are going to rely on the state pension to do the heavy lifting for us in retirement," says Glancy.

To qualify for any state pension, you need at least 10 years of sufficient national insurance contributions, and 35 years to receive the full state pension.

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To qualify for a year of pension credit, "you need to have at least one job during the year, which is paying you £123 per week or more. Some people have multiple employments, but at least one of them must be that size, or if you're self employed, your profits for that year need to be in the region of £6,750 or more," Glancy says.

When it comes to private pensions, many people are auto-enrolled into their employer's pension scheme.

Individuals may accumulate multiple pension pots throughout their careers, which can create challenges.

Glancy advises against being "seduced by sexy marketing and gimmicks" and instead recommended focusing on the investment performance of the pension plan, the charges associated with it, and the decision-making support available.

For those unable to afford an independent financial adviser (IFA), Glancy pointed to government services like MoneyHelper, which offers free and unbiased advice.

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"Many employers, especially larger employers, will have more generous contribution structures," he says.

Employees should investigate whether they can benefit from higher employer contributions, as this represents "free money" that could significantly boost their retirement savings.

Understanding the risk associated with different pension investment options is crucial, especially as you approach retirement.

Most pension schemes offer a default fund with a balanced investment profile, according to Glancy. But, depending on your age and risk tolerance, other options might be more suitable.

"As a rule of thumb, the more volatile investment strategies tend to do well over the longer term. But if you were in one of those volatile investment strategies getting close to retirement, and your pot went into a trough, your pot size could shrink significantly just because you're about to access it," he advises.

"So the more volatile investment strategies tend to be more suited to younger people, because the volatility is not quite as important."

Glancy also warns that "taking too much money out too quickly means you could pay an awful lot more in tax than you need to, and you won't get that money back".

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Up to 25% of the total value of your pension can be withdrawn tax-free – up to a maximum of £268,275 for those with the biggest pensions.

Plus, he notes that selecting certain products, such as annuities, is irreversible. Annuities provide a guaranteed income for life, which can be tailored to rise with inflation, but once chosen, cannot be changed.

An alternative to annuities is income drawdown, which allows the pension pot to remain invested while the individual withdraws funds as needed. However, Glancy cautions that this option carries risks, including the possibility of outliving one's savings or experiencing poor investment performance.

"The challenge with that type of product is that if you live for a very long time, you might run out of money. Then if the investment performance isn't good enough. Again, you might run out of money, so that is a tough choice," he says.

Glancy also emphasises the value of seeking advice from an IFA or using government resources like Pension Wise to navigate these complex decisions.

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