Dec 01
Senior couple walking through the park and pushing a bike

5 retirement challenges you could face and what to do about them

Whether retirement is over a decade away or just around the corner, you could face significant challenges that may affect the lifestyle you want. Learning more about these potential obstacles and taking steps to reduce their impact now could make heading into retirement smoother.

Almost half of people see retirement as a time of financial freedom

The Great British Retirement Survey from interactive investor found that 45% of people who have yet to retire view this chapter of their life as a time for financial freedom. Without work commitments, retirement can provide you with the space to focus on the things you enjoy. Achieving financial freedom can provide peace of mind so you’re able to embrace the lifestyle you want.

When asked what they hope to spend retirement doing, travel came out top. 3 in 10 (29%) of respondents said travelling more was their top priority when they retired. Using retirement as an opportunity to spend time developing a new business or hobby was popular too. 42% of people yet to retire are looking forward to this.

While you may be optimistically thinking about a time when you don’t have to go to work, reaching your retirement goals requires careful planning. There are challenges those approaching retirement could face, and they may derail your goals. Here are five challenges modern retirees need to think about to create a secure future.

1. Managing multiple pensions

Gone are the days when employees would stay at the same company for decades. Today, it’s far more common to frequently switch jobs to learn new skills and seize opportunities. The downside to this is that you can end up with multiple pensions. This can make it difficult to assess if you’re on track, and when you consider their various charges and investment performance, you could be missing out.

The Great British Retirement Survey found that 66% of people yet to retire have more than one pension, and 15% have four or more. Worryingly, 6% don’t know how many pensions they have. Keeping track of where your retirement savings are is important, as it can be easy to “lose” them. In some cases, consolidating your pension can make retirement planning simpler.

The challenge of multiple pensions is set to increase. Auto-enrolment means most employees will now benefit from a workplace pension. So, it can be easy to accumulate many different pots throughout your working life.

2. Deciding how to access your pension

How you access your pension has become more complicated. Previous generations would usually have a final salary pension or purchase an annuity to deliver a reliable income for the rest of their life.

This changed in 2015 when the government introduced Pension Freedoms. Under the new rules, you can still purchase an annuity, but you can also take a flexible income through drawdown or withdraw lump sums if you have a defined contribution (DC) pension. These changes provide more flexibility, but they also mean retirees have more responsibility and need to understand the pros and cons of each option.

Despite the complexities of this, just 27% of retired people in the survey worked with a financial planner. Those deciding how to access their pension were far more likely to rely on their own research (64%) or read the financial press (42%). While these steps can be useful, they can mean you miss vital pieces of information, and it can be difficult to understand how the options relate to your circumstances.

3. Running out of money

How long do your retirement savings need to last? Retirement can last for decades, and it can make it difficult to arrange your finances to deliver the income you need. It’s why 41% of workers worry about running out of money. Almost 3 in 10 (27%) retirees are still worried they don’t have enough to last their lifetime.

A financial plan can provide you with confidence about your long-term finances, even if you decide to take a flexible income.

4. Being affected by stock market volatility

If you decide to access your pension through drawdown, your savings will usually remain invested. This means your pension will remain exposed to market volatility. You may also have investments outside of your pension that you will use in retirement.

After the sharp market dip at the start of the Covid-19 pandemic, almost half of both workers and retirees list market falls in their top-three financial concerns. Market falls can mean your assets are worth less, but keep in mind that over the long-term, markets have historically recovered.

When you retire, having a financial buffer in cash can help reduce the impact of market volatility. Several months’ worth of expenses in an accessible account means you won’t have to withdraw from your pension amid short-term volatility. When investment values fall you have to sell more units to achieve the same level of income. Having cash to fall back on can help preserve your pension for the long term.

5. The rising cost of living

Inflation has been big news recently, so it’s not surprising that 42% of those that haven’t retired yet rate it highly among their concerns.

The Bank of England has an inflation target of 2% a year. However, due to Covid-19 and supply shortages, inflation in the 12 months to September 2021 was 3.1%. The central bank has said inflation could reach 4% in the coming months. Higher levels of inflation mean that day-to-day and luxury costs are likely to rise for households.

When making a retirement plan, you need to consider inflation and how it could affect your spending power. Over a retirement that could span decades, inflation can have a significant impact. There are several ways you can consider inflation when putting together your retirement plan. This may include leaving some of your pension invested with the aim of delivering returns that keep pace with or outstrips inflation. Or you may purchase an inflation-linked annuity to maintain your spending power.

Effective retirement planning can help you highlight challenges and put in place a plan that means you can overcome them and focus on what’s really important to you in retirement. If you’d like to talk about your retirement and the steps you can take to create financial freedom, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, 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. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.

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