What to do if you haven't saved enough for retirement？——Turning your pension into an income

If you woke up this morning with your head in your hands, screaming “I’m almost retired and I don’t have the savings I hoped for… what do I do?!” Don’t panic. It’s okay. You still have options.

Unless you’re lucky enough to have a very generous pension, you may need to be careful about how you manage your money when you retire. So whether you haven’t saved enough for retirement or you want to make your pension bigger, this article will give you advice.

What to do if you have a defined benefit？

If you’re lucky enough to be a member of a defined benefit pension plan (also called a final salary or career average pension plan), then you may not need to do anything.

If you’ve worked in the public sector (for example, the civil service, a school or a hospital), you may have a defined benefit pension. Some large companies still offer defined benefit pension plans. Check with your employer if you’re not sure which one.

● How defined benefit plans work:

A defined benefit plan automatically starts paying you a fixed income when you retire, and continues until you die. How much you get depends on how long you’ve been in the plan, and how much you earn when you retire (or how much you’ve earned on average throughout your career). The amount you get also tends to increase each year with inflation.

Because these pensions pay a regular lump sum until you die, they are often worth keeping. If you live 40 or 50 years into your retirement – as some people do these days – then this regular income can be a significant sum.

● Determine your benefits considerations:

While you can sometimes choose to transfer your money out of a defined benefit plan, this is usually a poor financial decision as you are unlikely to get back as much money as if you stayed in the plan. So it is vital to have a liquid and yielding investment.

If you decide to transfer your money out of a defined benefit plan, always get financial advice from a reputable independent financial adviser. Ideally, look for one with the Gold Standard accreditation for pension transfers.

What to do if you have a regular money purchase pension？

If your company doesn’t offer a defined benefit pension, your pension will be what’s called a ‘defined contribution’ or ‘money purchase’ pension. This means you save a fixed amount each month (usually paid in extra by your employer) and then invest that money in stocks and shares.

If you are one of the growing number of people with this type of pension, you have more choices to make when you retire. Unlike a defined benefit plan, your pension doesn’t automatically convert into income for the rest of your life.

Instead, you will have a pool of money that you can decide how to use to provide the income you need.

Buying an annuity

If you want to know how much income you will have for the rest of your life, then you could consider buying an annuity with your pension. This is a financial product that provides a fixed income until you die.

Advantages of annuities:

The advantage of annuities is that they allow you to know exactly how much income you will receive. The rise in interest rates over the past few years has made annuities a more attractive option.

Annuity options:

If you decide to buy an annuity, you can choose an annuity that pays the same amount every month for life, or an annuity that increases its payments with inflation.

Buying yourself inflation protection is a worthwhile investment because if you live a long time, you may find that your fixed income decreases every year.

However, if you choose an annuity that increases every year with inflation, then you will get a much lower annuity payment at the beginning.

Annuity considerations:

You may be able to get a higher rate if you have health problems or smoke. Rates for smokers can be around 10% higher, and rates for people with serious health problems are much higher.

There are some other options to consider when buying an annuity. For example, if you have a partner, you might want to buy an annuity that continues to pay out after the first person dies.

Or you might want the guarantee that the annuity will pay out for a fixed period, regardless of when you die.

It’s important to get independent financial advice before deciding which option to choose. Once you buy an annuity, you’re covered for life – so it’s vital to make the best decision for your circumstances.

Invest as much as you can!

Buying an annuity isn’t the only option for getting an income in retirement. You can also choose to continue investing in your pension and gradually withdraw the amount you need over time. This is called a pension (or income) withdrawal.

We keep hearing about “putting money into savings”, “growing savings”, “making sure we have enough savings for pensions” and “how hard it is to find a good savings rate”. But what about investing? Would you describe yourself as an “investor”?

Most people wouldn’t. They think investing is worrying, risky and for the rich and smart. When it comes to saving for the future, most people don’t put their money into the highest interest savings account they can find, other than paying into a workplace pension. But this means that most people are actually losing money by being cautious. This is because most people don’t know the difference between “saving” and “investing”.

What to consider when investing？

When you invest, inflation does matter.

You need to make sure that the money you save for your future (or your children's future) earns a return that's well above the rate of inflation, so that you can not only keep up with the general rise in the cost of living, but beat it.

Economists (and governments) tend to use a 2% inflation rate per year as a guideline, and that's a good number for you and me to use when we think about where to put our money in the future.

This means that, generally speaking, for long-term investments, we need to earn at least 2% per year to make ends meet, and at least 4.5% per year if we want to make enough money to live happily ever after.

Most financial advisors recommend that an average return of 4.5% should be the minimum one should aim for. Ideally, we should aim for a few percentage points higher than that. And right now, with inflation soaring (and likely to remain high for some time), people should ideally aim for an average return of at least 7% on their investments.

Is it too late to invest now?

If you haven’t saved enough for retirement, being in your 50s or 60s shouldn’t stop you from investing. You still have time to make your money grow. If you have little or no savings, act now and invest in products that will grow your money quickly so that when you are in your 70s or 80s, you will have more money to fall back on. Of course, it’s never too late to start now.

Benefits of investing in a pension

The benefit of investing in a pension is that you can benefit from the continued growth of your pension. Investing gives you more flexibility than annuities – allowing you to increase your income when you need it and reduce it when you don’t.

John's success story with retirement fund investment

John, a retired British resident who worked as a senior executive in a multinational company, began to pay attention to his financial situation after retirement as he got older, especially in terms of pension investment. He realized that traditional state pensions and personal savings alone might not be able to meet the living needs of him and his wife Serena in the future. So he decided to adopt an active fund management strategy to ensure financial freedom after retirement through diversified investment.

John invested part of his funds in the stock market, especially high-dividend stocks, to ensure a stable cash flow. In addition, he also invested in real estate investment trusts (REITs) and green energy projects, which not only increased the chances of returns but also diversified the risks.

John reviews his asset allocation once a year. If necessary, he adjusts his investment portfolio to ensure that it is in line with current market conditions and personal financial needs.

Through reasonable fund management and investment, John's pension account and other investment portfolios have grown steadily. Five years after retirement, he has not only been able to maintain a relatively comfortable standard of living for him and his wife, but also provided an education fund for his children. More importantly, John's financial freedom after retirement has increased. He and his wife no longer feel stressed about daily expenses and emergencies, and can fully enjoy retirement life in their own way.

Conclusion

Before you delve into the stock market, it’s important to get some information. Fortunately, there is a lot of information online, and you can start with articles on the Motley Fool and the BBC website.

Whatever savings or investment product you choose, make sure you fully research all your options. You can find out more about what benefits you are eligible for on the gov.uk website.