Filling the gap

There are a number of actions you can take if you’re worried that you haven’t saved enough for your life after work. From paying more into your pension and reviewing your investment strategy, through to using other savings and investments and cutting back on your expenses in retirement.

If all else fails, you can always choose to delay your retirement. This gives you more time to save and more time for your money to grow.

Pay more into your pension

If you want to boost your pension pot, think about making extra contributions:

• You’ll get tax relief on contributions you pay up to 100% of your earnings, subject to an overall annual limit of £60,000 (2024-25). This limit is called the ‘annual allowance’.

• If you haven’t used all your annual allowance in the previous three years, you can add the unused amount to this year’s annual allowance (though you can still only pay up to 100% of your earnings in a year).

• If you've started to withdraw your pension savings and take more than the amount you're entitled to take tax-free, your annual allowance could reduce to £10,000.

• If you're a high earner with an income above £260,000 a year, your annual allowance could gradually reduce to £10,000.

• If you earn less than £3,600, you can pay in up to £2,880 and still get tax relief.

• The annual allowance includes contributions paid by your employer too.

Review your investment strategy

Don’t be reckless, but a change in your investment strategy is worth considering.

If you’re still some way off retirement, think about investing more in growth assets. Let’s review the pros and cons:

• If you have money in defined contribution schemes invested cautiously, you may not lose much money if markets fall, but you won’t grow your money much either.

• All the evidence suggests that over the long-term investing in growth assets, like stocks and shares, will produce a higher return, so if you aren’t planning to retire soon it usually makes sense.

• If you do invest more of your money in growth assets, you should review this when you approach retirement. A market fall close to retirement may not give you time to recover any losses.

• The chance of higher returns carries with it the risk of losing money. If this would keep you awake at nights, it’s probably not right to change your investment strategy.

If you’re thinking of reviewing your investment strategy, you should consider taking financial advice.

"Defined Contribution Schemes"

Money paid into a defined contribution scheme is invested in funds chosen by you or your company. At retirement, the value of your pension pot will depend on how much has been paid in, plus any growth or decline in the value of your investments, minus any charges.

Use other savings and investments

Any savings and investments can help boost your income, often tax-efficiently.

Increasingly, people rely on other savings and investments they have to support their life after work. What’s more, many of these products can pay an income free of tax. Here are some examples:

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If you invest in stocks and shares directly or through a product – usually a unit trust, open-ended investment company or investment trust – you can withdraw up to the Capital Gains Tax Allowance each year without paying any tax.  The Capital Gains Tax Allowance is currently £3,000 (2024-25).

Releasing equity from your home

The equity in your home is often your greatest asset.

Your home can be a valuable source of income to support your life after work. There are different ways to do this.

The two main options are: 

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If you take a lifetime mortgage, which is a type of loan secured against your home, there are a number of issues to consider. For example:

• It will reduce the amount you could otherwise leave to your loved ones.

• Interest rates are often higher than those payable on conventional mortgages.

• If you choose not to make regular interest repayments during the life of the loan, the amount you owe can grow rapidly.

Downsizing could be the right course, but there are also things to consider:

• You may still need spare bedrooms for grandchildren to stay, so don’t overdo it.

• There will be costs in buying and selling. Make sure you release enough equity.

• When the time comes, it can be emotionally difficult to sell the family home.

Review your spending

There are usually savings to be made if you look closely.

Create a budget for retirement. Start by looking at your bank statements to understand your current spending. Then make some adjustments:

Think about what expenses will reduce or disappear in retirement. Will you have paid off your mortgage? Will you no longer need to commute? Perhaps you’ll spend less on clothes and take fewer expensive holidays?

In contrast, what might you spend more on in retirement? Energy bills could increase if you’re at home most of the day. Maybe you’ll spend more money on hobbies and interests?

Split spending between essential expenses, important expenses and optional expenses. If you need to make cuts, you can start with optional expenses first.

Other expenses

Some of your expenditure won't occur each month or even each year.

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Once you’ve completed your budget ask yourself:

Where could I make cuts? Review your optional expenses. Do you need to dine out so much each month or take as many holidays? You may not be prepared to compromise on this spending, but take a thorough look at where cuts could be made.

Can I get better deals? Check out the costs of insurance on your car and home. Are there cheaper deals available elsewhere? How about your internet and energy providers? Could you save money by switching suppliers?

Can I take more income?

You may be able to take more income from your pension, but care is needed.

If you decide to convert your pension pot into income using drawdown, you choose how much income to take each year.

If you want an income that should last a lifetime, and increases to offset inflation each year, some research suggests taking around 2-4% of your pension pot each year. This is based on someone retiring at 65.

These figures aren’t guarantees, but an indication of the level of income you could take to try to avoid running out of money.

There are circumstances when you could consider taking more than 2-4% each year. For example:

Poor health. If you suffer from a medical condition likely to significantly shorten your life expectancy you could think about taking a higher income.

Other assets. If you have other savings and investments to fall back on, or if you’re prepared to release equity from your home, you could take more income.

Ignore inflation. If you choose a fixed income that doesn’t increase each year you could take a higher income. Expenses often fall during retirement so this can make sense.

If you’re much older than 65 when you retire. Your savings don’t need to last as long, so you could take more than 2-4% each year.

Taking more than 2-4% each year is a risk. Even if you suffer from poor health you could still live longer than expected. Alternatively, if inflation is much higher than predicted, it could significantly reduce the spending power of your money in future. For example, in 2008 a pint of beer cost £2.30 and a fish supper £2.43! And if your investments don’t perform as expected this can also impact how much income you can safely take.

Working after retirement

Over one million people still work past their 65th birthday.

Increasingly people retire from their main occupation, but still work in some capacity. Alternatively, they might stay with their employer, but work part time.

It’s little surprise there are over one million people still working past their 65th birthday. At the same time, there are a few pitfalls to be aware of.

Means-tested benefits. If you are receiving or expect to receive means-tested benefits such as Pension Credit, Housing Benefit or Council Tax Support, then the amount you’re entitled to could be affected if you work beyond retirement.

Higher tax band. If you continue working, but also take your State pension and/or any private pension, this may tip you into a higher tax bracket.

Delay your retirement

Delaying your retirement can help your finances in more ways than one.

If you haven’t got enough money to retire when you planned, there is another option. You can delay your retirement. This can have several advantages:

Further pension contributions. If you delay your retirement it gives you more time to add to your pension pot.

Extra time for your money to grow. The longer you leave your money invested, the greater the likelihood that it will grow in value. Of course, this isn’t guaranteed and the value of your investments could fall.

A higher income. When you eventually retire you may be able to take a higher income because your money won’t need to last so long.

Defer your State Pension. If you delay receiving your State Pension, it will increase depending on how long you delay.

If you’ve been a member of a defined benefit scheme, you may not be able to defer taking your benefits. You should check with your employer or scheme administrator. Also, some defined contribution schemes offer valuable guarantees which have to start at a specific retirement age. You should check with your scheme before taking a decision to defer.

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For more information on this topic check out our Guide to Other sources of income in retirement.

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