Warning! This little-known State Pension rule change could halve your retirement income overnight

Harvey Jones says unless your build your own retirement savings, you’re at the mercy of changes to State Pension rules.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Despite its limitations, the State Pension still forms the bedrock of most people’s retirement planning. The first problem is, it only pays £8,767.20 a year, which is barely a third of the average full-time salary.

Beware falling income

There’s another problem. If you’re in a couple and your partner dies, their State Pension now dies with them. If you rely entirely on the State Pension, this could immediately slash your household income by half, according to a new warning from insurer Royal London.

It wasn’t always this way. Some bereaved spouses could claim an enhanced pension based on their partner’s National Insurance record. But this entitlement was swept away when the new State Pension was introduced in April 2016.

Married couples who retire after that date no longer inherit a State Pension when their spouse dies, so the survivor’s household income could plummet. Women are hardest hit, because they typically have fewer company pensions or other savings in their own name.

Single life annuity trap

They will be hit even harder if their husband bought a single life annuity which stops paying out when he dies. A joint life annuity pays a lower starting income but will continue to give a bereaved spouse 50% of that for life.

It’s all horribly complex. But if you are worried, it’s worth checking whether you will inherit your partner’s company and personal pensions should they die.

There is one more thing you can do. Reduce your reliance on the State Pension by saving for the future under your own name.

Get saving now!

If you have access to a company pension, resist the temptation to opt out. Then top it up by saving in a company pension, or Stocks and Shares ISA.

The ISA option is so attractive because it allows you to invest in pretty much any stock or fund you wish, and then take all your returns free of income tax and capital gains tax.

If you don’t know where to start, you could sign up to a low-cost online investment platform which allows you buy shares from just £25 a month, or lump sums of as little as £100.

Once you have done that, you need to start building a balanced portfolio with exposure to a mix of UK shares and funds, and global investments as well.

Start investing today

Perhaps the simplest way to start is to buy a low-cost exchange traded fund (ETF), such as the iShares Core FTSE 100 UCITS ETF, which simply tracks the performance of the UK benchmark index of top 100 stocks, with a tiny annual fee of just 0.07%.

You could then balance this by investing in medium-sized UK companies through another low-cost ETF, HSBC FTSE 250 UCITS ETF, which has a slightly higher ongoing charge of 0.35%.

That could give you a bedrock to your portfolio which you could then supplement with individual shares, such as oil major BP and global mining giant Rio Tinto. You might soon discover that investing can be fun, which should encourage you to put even more money away.

If you do this, the pain of bereavement won’t be made worse by that subsequent financial shock.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

2 UK shares and funds to target a sizzling summer return!

With investors buying gold again, and central banks still building their bullion reserves, I think these UK shares and funds…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

If investors had bought £1,000 worth of Aviva shares 5 years ago, here’s how much they’d have made…

Aviva shares have more than doubled in price under Amanda Blanc's leadership, but how much have investors made? And can…

Read more »

Businessman hand flipping wooden block cube from 2024 to 2025 on coins
Investing Articles

2 soaring dividend shares to consider for both growth and income!

This Fool's spotted a rare occurrence: two dividend shares delivering impressive growth while maintaining attractive yields.

Read more »

Two business people sitting at cafe working on new project using laptop. Young businesswoman taking notes and businessman working on laptop computer.
Investing Articles

After crashing 40% in a year, is this a bargain basement value stock?

This once-beloved growth stock has fallen from grace as its sales momentum stalls, but after multiple price crashes, is it…

Read more »

Shot of an young mixed-race woman using her cellphone while out cycling through the city
Investing Articles

Simple truths about starting an ISA

Dr James Fox explains how investors can open a Stocks and Shares ISA and aim for long-term wealth generation. Getting…

Read more »

A senior man and his wife holding hands walking up a hill on a footpath looking away from the camera at the view. The fishing village of Polperro is behind them.
Investing Articles

Here’s how I’m using my ISAs to target retirement riches

A comfortable retirement's on my mind and I'm using my ISAs to help me get there. But while my cash…

Read more »

Businessman with tablet, waiting at the train station platform
Investing Articles

134,000 reasons why I prefer FTSE 100 stocks over cash savings!

The results are in! Investing in FTSE 100 stocks can be a superior way to build wealth than saving, as…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Here’s how long it’s taken £1k of Nvidia stock to turn into £10k today!

Our writer explains how money invested in Nvidia stock less than three years ago has grown in value over tenfold…

Read more »