The fundamentals of retirement planning are changing and dynamics are shifting. This means that traditional pension saving might not be enough and that alternatives must be found.
This article will delve into some of the most likely retirement risks and help you combat them with your savings and investment strategies.
A Shift in Pension Types
Defined benefit (DB) pensions provide a guaranteed retirement income and have been the traditional pension type in the UK for a long time. They were stable and low in risk, which was great for pension savers.
However, DB pensions are now becoming rare and being replaced by defined contribution pensions (DC). With DC pensions, the amount you have in retirement will depend on your contributions and investment performance over the years, and they are inherently more risky.
Longer Life Expectancies
Life expectancies in the UK have risen over the years and as a result, traditional retirement savings like workplace pensions and the State Pension might not be enough. This creates a higher risk environment and the need for larger retirement funds to cover extended retirement timeframes.
Uncertainty
Uncertainty has been rife in 2024 and economic challenges such as taxation changes, potential reductions to state pension benefits, and the increase of the State Pension age are all concerning for savers. The State Pension amount is also currently capped at £10,600 per year, which is unlikely to meet the needs of many retirees.
As a result, you must account for policy changes that could affect retirement income. You also need to look at alternatives to traditional savings if you want to live a comfortable retirement lifestyle.
Inflation
Inflation reduces the purchasing power of pension savings which is exacerbated by rising housing costs, healthcare, and energy bills. Another knock-on effect of high inflation is low interest rates and returns, which both create a difficult environment for retirement savers trying to grow their wealth with traditional methods.
Traditional Pension Alternatives
Investments
A diversified investment portfolio consisting of the likes of stocks, bonds, mutual funds, and ETFs offers higher growth potential than regular savings accounts. This has been proven to be true historically and is unlikely to change. However, it’s important to align your investment portfolio with your retirement goals and risk tolerance.
Investments can include property, too, with buy-to-let purchases potentially generating passive income in retirement. There are also REITs (Real Estate Investment Trusts) that can have the same effect.
Lifetime ISAs (LISAs)
LISAs are a government-funded initiative that can supplement your retirement savings. You can contribute up to £4,000 annually and the government will add 25% at the end of the year, which would be an additional £1,000 in this scenario.
Alternative Assets
As well as (or instead of) investing in stocks, bonds, ETFs, and mutual funds, you can consider alternative investments like commodities and private equity. These are seen as riskier products to invest in, however, but can mean higher returns.
Green bonds and investments also fall under the alternative asset banner and are seeing a surge in popularity that looks set to continue into the future.
Three Ways To Combat Financial Risks
- Save early and consistently, even in difficult economic periods.
- Diversify your income streams. Don’t rely on one pension pot and instead, combine private pensions, investments, and alternative savings vehicles.
- Stay informed about policy changes regarding tax, pension rules, and inflation.
Conclusion
Proactive planning is key to a comfortable retirement and a consistent, diversified approach helps you mitigate risk and earn more. Not only will this help you reach your long-term goals, but you’ll enjoy peace of mind and security by taking charge of your future.
For advice regarding retirement planning, contact our experts on 020 8366 4400 or email enquiries@cedarhfs.co.uk.