Is your pension one of the “ticking time bombs” of retirement challenges?

Are you on track to afford your preferred standard of living in retirement?

While your immediate answer may be “yes”, a new piece of research suggests that a large proportion of private sector workers are not on track to retire comfortably. The Institute for Fiscal Studies (IFS) report, published in September 2024, found that “a substantial minority”, meaning a little less than half, of private sector employees are not “on course to meet standard benchmarks of retirement income adequacy”.

In response, FTAdviser reports that a senior official at provider, Royal London, called the UK retirement landscape a “ticking time bomb”, warning that “increasing numbers of people [are] heading into retirement with inadequate savings”.

Last month, we talked about why it’s important to keep track of your pension before retirement in order to ensure good financial health later in life.

Continuing on this topic, keep reading to learn why many retirees may be inadequately prepared for retirement and how you can ensure your funds are on track.

An increased emphasis on personal retirement funds may make it harder for workers to save

In previous generations, salaried workers often benefited from defined benefit (DB) pensions, sometimes referred to as “final salary” pensions.

These schemes meant workers were paid a proportion of their salary in retirement, depending on their years at the firm and how much they earned. In some cases, these payments were indefinite, giving retirees huge peace of mind that their pension wouldn’t “run out”.

However, in 2024, most of these schemes are either already closed or winding up in the near future. The Pensions Regulator reports that as of 2023, the total number of DB schemes shrunk by 2%, with the percentage closed to future accrual standing between 70% and 72%.

As an alternative, most workplace pensions today come in the form of defined contribution (DC) pensions. These are pension “pots” that are usually invested on the saver’s behalf, receive tax relief, and normally benefit from employer contributions too.

Crucially, though, DC pensions are controlled by the pension holder. A worker can opt out of making contributions altogether and choose to take home this money instead. In the two years to September 2023, Royal London reports that 33% of workers investigated stopping or reducing their pension contributions.

What’s more, stock market fluctuations could have an effect on your pension pot’s growth. If you choose to take your pension as lump sums or flexibly, rather than purchasing a guaranteed annuity with the fund, world events could have a short-term impact on how much you can take out and how long your pot lasts.

This is why, if you have a DC pension and are approaching retirement, it may be wise to conduct a thorough pension review with the help of a financial planner. Taking this step might help you spot any prospective shortfall in your retirement income and plan accordingly ahead of time.

A greater reliance on paid-for later-life care could deplete retirees’ wealth in future

Another key reason that the retirement landscape may be harder for current and future retirees is later-life care. Your pension and other retirement savings may need to stretch much further if you need elderly care.

Importantly, the demand for social care may only rise, due to the disproportionate increase of elderly individuals versus working-age people in the UK. The below graph demonstrates how the number of people living to over 85 is set to rise much more steeply than those of working age.

Source: Office for National Statistics (ONS), published by The King’s Fund in 2024.

Under 2024/25 rules, anyone with capital (including their home) worth more than £23,250 is required to pay for all of their own social or nursing care, unless they qualify for continuing healthcare (CHC) under the NHS. CHC is hard to come by, meaning it’s likely you would need to pay your way if you needed care.

As of July 2024, Age UK reports that it costs around £800 a week for a place in a residential care home and £1,078 a week for nursing home care.

So, while you might feel you’re entirely on track to meet your own needs in retirement, remember to factor in later-life care. Creating a solid plan for how you’d fund this care, if needed, is an important step to take before you retire.

Higher levels of debt could follow even high-earning individuals into retirement

According to a report published by IFA Magazine, the number of retirement-extending loans rose from 31% to 42% in 2023. Equity release loans rose by 23% in the same time frame.

Plus, 37% of Brits say their quality of life is going to deteriorate due to a lack of pension funds available to support them in retirement.

If you have a mortgage or other debt that extends beyond your retirement date, this could apply further pressure to your pension and other retirement income sources. With a higher cost of living and potential care costs at play too, you could be worried about debt eroding your financial stability later in life.

If you find yourself worrying about having sufficient funds to retire comfortably, your Kellands financial planner can help. We can assess your debt, retirement savings, and potential costs to provide a succinct projection of your retirement income. If you’re dissatisfied with the outcome, we can work with you to bridge any gaps in your retirement plan before the date arrives.

Get in touch

The above retirement challenges are only a handful of the many potential obstacles you might face – tax, unexpected life events, and inheritance planning could also come into play.

To learn more about boosting your retirement prospects with the help of a professional, reach out today.

Email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, cashflow planning, or tax planning.

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. 

Workplace pensions are regulated by The Pension Regulator.

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, tax legislation, and regulation, which are subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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