While the saying might be “money can’t buy happiness”, research suggests that financial stability certainly plays a role in your overall wellbeing. In retirement, when you’re no longer earning a salary, finding a way to create financial stability could be a vital part of building a lifestyle that allows you to enjoy the next stage of your life.
Legal & General and the Happiness Research Institute carried out a study to uncover what makes people happiest in retirement.
The happiest respondents enjoyed good health and satisfying close relationships. They also valued their independence and filled their time with meaningful activities. Together, these factors may help you create a retirement that supports your wellbeing.
Underpinning these components was a consistent key factor – a predictable income.
Interestingly, retirees often didn’t need a large income, but feeling financially secure was important. Indeed, the research found that a stable income of £1,700 a month for an individual supported happiness. The boost of a higher income started to level off once it reached around £2,000 a month.
Over the last few years many households, including retirees, have had to adjust their spending as high inflation has led to higher outgoings. So, it’s perhaps unsurprising that financial stability is valued.
In addition, changes to how you can access your pension in 2015 have offered greater flexibility to retirees. While many welcomed Pension Freedoms, they also added a layer of complexity and may mean some retirees no longer receive a reliable income from their pension savings.
3 types of retirement income that are reliable
The research found that many retirees were concerned about their financial security, and 27% said their finances are often or sometimes unpredictable or difficult to keep track of.
So, understanding what income is reliable and whether it could meet your essential outgoings might offer peace of mind. Here are three types of dependable income you might receive once you retire.
1. State Pension
The State Pension often provides a foundation to build your retirement income on. It’s valuable for two key reasons:
- It provides a regular income you can rely on.
- Under the triple lock, it increases each tax year, which helps to preserve your spending power.
The full new State Pension would provide an income of £221.20 a week, or around £11,500 a year, in 2024/25. However, the amount you receive will depend on your National Insurance (NI) record and when you reach State Pension Age.
Usually, under the new State Pension rules, you’ll need at least 35 qualifying years to receive the full amount. You can use the government’s State Pension forecast to understand how much you could receive and whether you’d benefit from filling in NI gaps.
One potential issue to note is that you may plan to retire before State Pension Age. The State Pension Age is currently 66 for both men and women and it’s set to rise to 67 between 2026 and 2028. The government could announce further increases in the future too.
So, you might need to take a higher income from other assets before you reach State Pension Age to bridge the gap.
2. Defined benefit pension
If you have a defined benefit (DB) pension, also known as a “final salary pension”, it’ll pay you a regular income from when you reach the retirement date until you pass away.
How the amount of income it provides is calculated varies between pension schemes. However, it’s usually linked to the number of years you paid into the scheme and your salary.
In many cases, the income provided will rise in line with inflation and the scheme would provide an income for your partner if you pass away first.
3. Annuity
If you have a defined contribution (DC) pension, you’ll often be able to access your savings when you reach the normal minimum pension age, which is 55 (rising to 57 in 2028).
One of the options you have with a DC pension is to purchase an annuity. An annuity would provide you with an income for the rest of your life or a defined period, and might help to create financial stability in retirement.
You may choose an annuity that will rise in line with inflation or would provide an income for your partner if you passed away first.
A flexible income could also provide you with financial security in retirement
With a DC pension, there are other ways to create a retirement income too. While these options might not provide a reliable income, they could still offer a sense of financial security and might better suit your needs.
For instance, you may choose flexi-access drawdown. With this option, your pension would typically remain invested and you withdraw an income, which you can adjust. This might be useful if your income needs could change throughout retirement.
Understanding the potential long-term effect of your withdrawals, and calculating what a sustainable withdrawal rate looks like for you, could help you feel confident in your finances even if you choose a flexible income.
Contact us to talk about how you could create financial stability in retirement
Most retirees will receive an income from several different sources. For example, you might benefit from a reliable income from the State Pension and a DB pension, which you supplement with a flexible income from a DC pension.
Juggling these different income streams can be confusing and might mean you’re worried about your finances, even when you’re in a good position. A financial plan could help you understand which options are right for you and give you confidence in the future, so you’re able to enjoy a happy retirement.
Please contact us if you’d like to arrange a meeting with our team.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. 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 fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Drawdown pension plans (unsecured income) are complex and are not suitable for everyone. Pension decisions can affect your income for the rest of your life (and that of any partner and other dependants). Where benefits are accessed on a flexible basis, these are not fixed or safeguarded for life. If security of income is important to you then you should consider purchasing an annuity or taking a scheme pension to provide a secured level of income.
The value of pensions and any income from them can fall as well as rise. You may not get back the full amount invested.
