Guarantees are good. You can rely on guarantees and build plans using them as foundations. That’s why guaranteed income in retirement is so important. It provides peace of mind that the essentials will be covered in later life. It isn’t always easy to find, though.
Many more of us used to have defined benefit pensions than we do today. These would pay a fixed sum every month at retirement, based on your final salary and how long you worked for your employer. But hardly any younger pension savers will get one. Instead we’ll retire with defined contribution pensions, and the amount we end up with will be based on how much we’ve paid into our pot and how well our investments perform over time. And as we know, with investing there are no guarantees.
The irony is that we’re living longer, which makes stretching our retirement incomes, maybe across three, even four decades, harder. Pension savers have never needed guaranteed income more.
Until relatively recently, buying an annuity with a pension pot solved many a saver’s guaranteed income needs as an annuity pays a fixed sum every month for life, or a set number of years. But the income you could buy got less and less, so savers argued they weren’t very good value. After pension freedoms were introduced in 2015, no one had to buy an annuity anymore, so many savers chose not to.
Even so, there’s still a strong desire, and need, for a guaranteed income in retirement. So what can you do? Here are five ways to increase your guaranteed income in retirement.
1. Defer your State Pension
For every nine weeks you defer your State Pension the government will increase the amount you receive by 1%. This is around 5.8% for each year. So, if at State Pension age (currently 66) you’re due the full State Pension of £179.60 per week but decide to defer it by a year, you would get an extra £10.37 a week. It can make sense to hold off on taking the benefit if you can, so you have that guaranteed income when you need it in later life.
2. Boost your National Insurance Contributions
You need 35 years of National Insurance Contributions to get the full State Pension. But you may have some gaps that mean you miss out, for example if you’ve been unemployed, on a low wage, self-employed, looking after children, or working abroad.
You can usually top your record up though, to get the full amount. Roughly, voluntary contributions can be made for the past six years, and the deadline is 5 April each year. See how many years you have online at gov.uk/check-national-insurance-record.
3. Defer your defined benefit pension
Check your pension paperwork as you may actually be one of the lucky ones who has a defined benefit scheme tucked away. If you do, you may be able to put off taking it, and use up other income first instead so you have a guaranteed income to fall back on when you need it later.
The bonus with deferring a defined benefit pension is that you’ll typically get a guaranteed uplift. This increases your annual income and any entitlement to tax-free cash as a result - something you don’t get with defined contribution schemes.
4. Pay more into your pension
Making additional contributions into your workplace or personal pension won’t guarantee you additional income in retirement, but it will put you in a good position to capitalise on compound interest and investment growth. Plus, if you increase your workplace contributions you may be able to ask your employer to pay more in too via Auto-Enrolment.
If you do have a defined benefit pension, making additional voluntary contributions will get you a higher guaranteed income in retirement. You’ll need to be an active member (i.e. still paying in) in order to take advantage of this, however not all schemes offer it. You’ll also need to weigh up how much you’ll likely get back in income.
5. Don’t discount annuities altogether
Annuities aren’t all bad. You may decide to shun an annuity at the start of your retirement but it could look more appealing later on. Annuity rates increase the older you are when you buy one, and if you find yourself in poor health, with high blood pressure or arthritis, or become seriously ill, you’ll be able to buy an “enhanced annuity” which offers an even better rate.
You can compare pension annuity rates online, or speak to a financial adviser if you’re not sure what to do, in particular if you’ve got a high-value pension pot or you’re looking at more complex annuity options.
Risk warning: As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
