Whether it’s around the corner, several years or decades away, financially secured retirement requires planning. In order to plan retirement a person should be able to generate an income for life. It is very important to make sure this income never runs out no matter how long an individual lives. It is also vital to ensure that the income is inflation proofed.
Impact of Inflation
Inflation is a trend of increasing prices from one year to the next, consequently, the purchasing power of currency is falling. The rate of inflation represents the real value of your pension and therefore it is necessary to know this in order to have a guide as to the investment return rate to maintain your standard of living expected in retirement. Inflation can impact a person’s retirement income more than anything else.
A British National retiring at 60 today will be expected to live for 18 years on average after retirement. It is entirely possible for a person retiring at 60 today to live for 40 or even 50 years after retirement. If an individual had set aside a sufficient pension to pay them $5,000 per month at retirement we might feel they have a well-financed retirement. However, without an increase for inflation and an average inflation rate of just 3%, this $5,000 will be worth $3,800 in 10 years, $2800 in 20 years and just $2,067 in 30 years. Considering this, the return from investment should be at least equal to or greater than inflation rate.
An annuity is a regular income guaranteed for life. You “buy” an annuity with your pension fund after retirement. Basically you exchange the sum you’ve saved for an annual income.
If you have an occupational pension your employers will normally arrange your annuity when you come to retire. You don’t have any choice in the matter.
If you have a personal pension, as retirement approaches, your pension provider will contact you with an offer of an annuity
When you buy an annuity you lose your pension fund forever by swapping it for the agreed regular income. There’s no going back and your loved ones do not get whatever’s left over when you die. The pension you saved for years is not yours anymore.
Annuities also have very poor rates. As the insurance company must insure your income for life they generally aim at very low risk investments. A typical annuity rate for a 60 year old is 4%. For example, £100,000 into an annuity will pay an income of £4000 per year with loss of the entire fund on death.
In the modern work environment people will tend to move across many different employers. As a result most people will tend to have more than one pension. These pensions that are not being contributed to are referred to as ‘frozen pensions’. These are pensions which are no longer receiving funds from either the member or the employer.
Farringdon Group’s retirement financial planning specialists can help you choose from the full spectrum of both offshore and onshore private pension plans to help you find the best of for you and we can assist to unlock these frozen pension to get this investment working for you and the future.
I hope that you have enjoyed reading this post.
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