The State Pension: are you worried about it?

Will the State Pension be sufficient to provide a financially free and easy retirement?

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With the State Pension amounting to just over £8,500 per year, it’s unsurprising that many people are concerned about their financial outlook in retirement. The State Pension amounts to less than a third of the average salary in the UK, which suggests that it’s unlikely to be sufficient to provide financial security in older age for most people across the country.

Furthermore, the age at which the State Pension is payable is set to rise. This could make retirement even more challenging for those who are currently still in work. And with an ageing population, it would be unsurprising for the age at which the State Pension is paid to continue to increase over the coming years. The overall political consensus may be that it’s becoming increasingly unaffordable.

Alternatives

Clearly, working to older age is not a viable option for most people. This may be through choice or need. But in any case, it seems clear that retirement planning during an individual’s career could become increasingly important. And with life expectancy set to continue increasing, the amount that an individual has invested in a pension on retirement may have to last longer than ever. As such, a larger nest egg may be required at age 65 than has been the case in the past.

Fortunately, there are a number of options available to individuals who are worried about their financial outlook in retirement. For those who are seeking to have a greater amount of control over where their pension is invested, products such as a Lifetime ISA and SIPP could be worthy of consideration.

SIPP contributions are not subject to income tax, which means that the value of amounts invested may increase at a relatively fast pace over time. And with up to 25% of any withdrawals made after the age of 55 being tax free, it appears to be a tax-efficient means of saving for retirement.

A Lifetime ISA is only available to investors under the age of 40. While its contributions are subject to income tax, there is a 25% government bonus, and withdrawals are not subject to tax provided they are made after the age of 60. Any amounts invested in a Lifetime ISA can also be used to fund a deposit for a first home.

Outlook

With the FTSE 100 having experienced a bull market for nearly 10 years, now may seem like the perfect time to buy shares. The global economy is performing well, and forecasts are generally buoyant.

However, due to the cyclical nature of stock markets, a more challenging period may be ahead over the medium term. Therefore, it may prove to be crucial that investors seek wide margins of safety in the shares they buy, and also consider defensive shares which have a track record of growth. Doing so could improve an investor’s risk/reward ratio and help them to generate a robust pension portfolio at a time when the State Pension is becoming increasingly inadequate.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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