If your pension savings aren’t enough to fund the retirement you want, don’t worry. There are other sources of income you can consider.
The value of the State Pension
The State Pension can be a valuable source of money when you retire. Currently you can start receiving it from age 66, then it’s due to increase to 67 between 2026 and 2028, and age 68 from 2044. These rules are subject to change, so it’s worth checking your State Pension Age here - www.gov.uk/state-pension-age.
How much will you receive?
The answer is – it depends! Here are the key things that impact how much State Pension you'll receive:
- To receive the State Pension you’ll need to have paid National Insurance contributions (or received National Insurance credits – see below) for at least 10 years. To qualify for the full amount you’ll need at least 35 years of contributions or credits.
- If you’re over 55, the Government’s State Pension forecast (www.gov.uk/check-state-pension). tells you how much State Pension you’re likely to receive. It’s worth checking it out so you can consider plugging any gaps you have.
- If you don’t qualify for the full amount, you can ‘buy’ extra years to boost your State Pension - www.gov.uk/voluntary-national-insurance-contributions.
- You might receive National Insurance credits if you’re ill or not in paid employment. You can check if you’re eligible here – www.gov.uk/national-insurance-credits/eligibility.
- You can choose to delay taking your State Pension. This increases the amount you receive later on by 1% for every 9 weeks you delay. That’s nearly 6% for every full year you delay.
Individual Savings Accounts (ISA)
You can currently save a total of £20,000 into an ISA each tax year. When you come to spend your ISA savings, you don’t pay any income or capital gains tax on gains you make, including interest earned. So, unlike pension savings, any money you withdraw doesn’t count towards your income tax allowance for the year. And there’s no need to declare it on your annual tax return (tax treatment will depend on your individual circumstances and may be subject to change in the future).
There are different types of ISA, such as cash, stocks & shares and innovative finance ISAs. Until now, you could only open one of each type of ISA in any tax year, with the £20,000 limit spread across them all. But from 6 April 2024 you can subscribe to more than one ISA of the same type in the same tax year (excluding the Junior and Lifetime ISAs), as long as your overall contributions don’t exceed the £20,000 limit.
Releasing money from your home
For many people their home is their biggest asset and there are ways to release money from your home to help fund retirement:
Downsizing
You could free up money by selling your home and moving to a smaller property. Or buying a similar sized home in a less expensive area. You might also save on bills and maintenance costs. Remember there’s a cost to buying and selling a property, so make sure you do your sums before committing.
Equity release
If you don’t want to move, there are ways to access some of the money held in your property without having to sell it. This is a big decision, so talking to your family and seeking financial advice is highly recommended.
That’s because equity release will affect how much money you leave as an inheritance and there might be tax implications to consider. Also - some state benefits are means-tested, such as pension credit for example. These benefits could be affected if you release equity from your home.
Here are some of the options:
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A lifetime mortgage is available to UK homeowners age 55 or over, and lets you borrow money against the value of your home. You don’t usually repay the loan until you (or both of you if borrowing jointly) move permanently to a care home, or die. You have the right to stay in your home until that happens.
The interest you pay is normally higher than a conventional mortgage and is usually fixed for the life of the loan. It’s added to the loan each year, so you’ll pay interest on the loan plus the interest. The amount you owe then builds over time. How much you, or your estate, pays back depends on:
- how much you borrow;
- the interest rate you borrow at; and
- how long you have the loan before it’s repaid.
Most lifetime mortgages come with a ‘no negative equity’ guarantee. This means you’ll never owe more than the value of your home when it’s sold (normally when the last borrower dies or enters long-term care).
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A home reversion plan is usually available to those aged 65 or over. This is when you sell all or part of your home to a company and they pay you a lump sum or regular income in return. You have the right to carry on living in the house rent free (or for a fixed rent) until you die or move out. The amount you receive for the share you sell will be below the market value.
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A retirement interest-only mortgage can sometimes be used to release equity from your home. It’s similar to a normal mortgage but you only have to prove you can repay the interest. The loan itself is paid off when you die or move into long-term care and your house is sold.
Working in retirement
Continuing to work in retirement brings opportunities to socialise, gives a sense of purpose and can promote mental and physical well-being. And the extra money helps too. However, there are things to consider:
- If you continue earning while also taking an income from your pension and the State Pension, you could tip into a higher income tax bracket.
- If you get means-tested benefits such as Pension Credit, Housing Benefit or Council Tax Reduction, these benefits could be affected if you work in retirement.
Benefits and allowances
You might be entitled to some benefits and allowances:
Council Tax Reduction
If you’re on a low income or claiming benefits, you could get a discount from your council tax. Each local authority runs their own scheme, so search your local council’s website for information (a different scheme applies in Northern Ireland). Enter your postcode in this Council Tax Reduction tool (www.gov.uk/apply-council-tax-reduction) and it will give you a link that takes you directly to information about the discounts available in your area.
Disability allowances
If you have a long-term physical or mental health condition or disability, and this means you have difficulty doing certain everyday tasks, you could qualify for:
- A Personal Independence Payment (www.gov.uk/pip) if you’re under State Pension Age when you claim. In Scotland this is known as an Adult Disability Payment.
- An Attendance Allowance (www.gov.uk/attendance-allowance)if you’re over State Pension Age when you claim.
Pension Credit
Pension Credit was introduced in 2003 to help pensioners on low incomes. There are two elements:
- Guarantee Credit brings your income up to the minimum the Government believes you need to live on. The age at which you can qualify is linked to the State Pension age.
- Savings credit isn’t available if you reached State Pension Age after 6 April 2016, unless you’re part of a couple and one of you reached State Pension Age before this.
You can find out if you qualify for Pension Credit at www.gov.uk/pension-credit-calculator.
Next steps
- We recommend you find out how much State Pension you qualify for using the links above.
- Start gathering all the information you have on the value of your savings, investments and pensions. This will help you make a plan for retirement.
- We strongly recommend you take advice from an adviser authorised by the Financial Conduct Authority (FCA) before making decisions about your pension, savings, investments and property.
