What are your options if you have a pension gap?

After going through your retirement plans and current provisions, you find there’s a gap. Don’t panic, there are still things you can do to provide financial security throughout retirement and overcome a pension gap.

The good news is that by taking a proactive approach to managing your retirement finances and plans, you’re in a position to make the necessary changes to get plans back on track. There are many reasons why you could find an unexpected pension gap, some of which may have been outside of your control, such as:

  • Not previously considering how long your pension will need to last for
  • Investments not performing as well as anticipated
  • Redundancy or a reduction in pay decreasing pension contributions
  • Having not considered potential retirement costs, such as care

Understanding why there has been a shortfall is important, but you should be looking ahead to create a solution. If you find there is a gap between your pension expectations and reality, you’re not alone.

Millions are facing a pension shortfall

The average amount sitting in a pension after a lifetime of saving is £61,897. Whilst it’s important to note that many people will have more than one pension and this figure includes small, forgotten schemes that were only contributed to briefly, this is far below what many would need to maintain their lifestyle.

Research from AJ Bell highlights how much is needed to plan for a 100-year life, a milestone that more and more people are reaching. If you retired at the age of 65 with the aim of creating £20,000 income from your pension alone, you’d need a pension pot of £477,000. This assumes the pension would be invested and achieves average returns of 5%.

The above research shows how millions could be facing a retirement that doesn’t meet their expectations because they don’t have the pension savings necessary. But there are steps you can take to manage your pension wealth so you can head into retirement confident in your finances.

1. Delay retiring

Whilst this may not be an appealing prospect for some, delaying your initial retirement plan means you can afford to retire with a smaller pension. If you’re happy in your current role, it’s worth considering.

Going back to the AJ Bell research, for example, if you retired at 70, instead of 65, you’d need £40,000 less in your pension. Delay retirement for another five years and the pension fund required falls to £362,000. If you don’t want to compromise on retirement lifestyle, a delay can be a way to still achieve this.

However, you will need to think about your current employment. Would you be happy to continue working for another five or ten years? Would adjustments need to be made? For some, cutting back at work may also be an option. Opting for a part-time position or moving into a less demanding role can help you transition from full-time employment into retirement without relying solely on your pension savings.

2. Make additional pension contributions now

If retirement is still some years away, making additional payments now can help you close that pension gap.

As you’ll receive tax relief on your pension contributions and the money is invested, your pension will grow beyond simply your contributions too. Some employers will match your contributions as part of your benefits package, so it’s worth checking if you can take advantage of this.

If you’re increasing your annual pension contributions, you need to keep the annual allowance in mind. This allowance restricts how much you can pay into a pension and still benefit from tax relief. Unexpectedly exceeding the annual allowance can result in a tax bill you haven’t anticipated.

The current annual allowance is your annual earnings or £40,000, whichever is lower. However, if you’re a high earner, you may be affected by the tapered annual allowance. This can reduce the amount you can tax-efficiently save to a minimum £10,000. If your income is above £150,000, please contact us to discuss your annual allowance.

3. Adjust your retirement lifestyle

If you’re set on your current retirement date, adjusting your retirement lifestyle is a common solution for those with a pension gap.

You may not need as much income as you think in retirement. Many retirees find their day-to-day expenses fall once they no longer have working commitments. Everyone’s retirement goals and, therefore, income is different, but a general rule of thumb is you’ll need two-thirds of your current income to maintain your lifestyle.

It can be difficult to understand what a lower retirement income will mean for your lifestyle long term and financial security. This is an area financial planning can help with. It can help highlight where savings can be made and how your pension will provide an income throughout retirement. You may find that even with concerns about a pension gap, you’re able to lead the retirement life you want.

4. Assess if other assets could be used for income

Pensions are often our main focus as we approach retirement. But other assets can play a crucial role too.

Could the money you’ve been stashing away for an emergency, now be used to fund retirement plans? Is it possible for property assets to boost your savings? Do you have other investments that you can start withdrawing an income from?

For most of those approaching retirement, pensions are just one asset that can be used. After a lifetime of saving, it can be difficult to start depleting assets you’ve built up. Taking some time to understand how they can help you in retirement and how your wealth will change over time can give you the confidence to use them.

The importance of planning ahead for retirement

For much of our working life, retirement can seem like a far-off milestone. But thinking about the lifestyle you want and the assets you need to achieve it years ahead can ensure you’re on the right track.

Retirement planning gives you an opportunity to make the choices that suit your aspirations and needs. Failing to assess your pension and other assets until the point of retirement can mean you have limited options if you do have a pension gap. The sooner you act, the more control you have over your future financial security and lifestyle.

Please contact us to discuss your retirement goals and plans.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.