If you are soon to retire, you will probably have been giving quite a lot of thought to your finances, and how you will be able to fund your retirement.
Most people tend to rely on a combination of the state pension and a company or private pension to provide for their needs. Since the Government changed legislation in 2015, you can choose to use your pension in whatever way you like, and you do not need to purchase an annuity.
Research has shown that the average pension pot is around £50,000. This might sound like a lot of money but life expectancy is increasing and you might find that you are in retirement for more than twenty years – in which case, £50,000 amounts to around £2,000 a year! With the state pension of £154 per week (as of April 2016), you are unlikely to be having a luxurious retirement.
Enhance Your Pension Income
There are some options available to you to your enhance pension income. The obvious step is to work in a job with a good pension and, with the introduction of auto-enrolment for all eligible employees in the UK, this might something that many people have in the future. But, if you do not have a good pensions, here are some other possible options available to you:
Rental Income From A House
The booming property market has led to many people being interested in buying a house to let out with the prospect of enjoying income from the rent together with capital growth on the property. This can be a profitable exercise if you have enough money to be able to invest into a residential property. However, there are some drawbacks:
- Your house needs to be occupied by a tenant in order to generate income: if there are periods when you don’t have a tenant, you will have no income.
- You need to consider the effect of professional charges against from letting agents, solicitors, estate agents, etc.
- You will be responsible for maintaining the property to a good standard.
- When you sell your home, you will be liable for capital gains tax on the profits, over and above your annual CGT allowance.
- The Government has reduced tax benefits on buy-to-let homes and there may be more changes in the future.
Rental Income From Your Own House
If you have a house with a spare room, you could rent it out under the ‘Rent-A-Room’ scheme which allows you up to £7,500 of untaxed income each year for letting out your home in this way.
You could use your money to buy stocks that provide a good dividend payment each year. You will be able to use the dividends as a form of income and you might be able to benefit from the rise in share prices when you sell at a later date. You will need to undertake a lot of research, or employ the services of a stockbroker.
Part Time Job
Many retired people choose to continue working in their current role, or something entirely different, in order to keep some income coming in. Not only are there financial benefits to working part time but research has shown that being active in retirement leads to better mental and physical health.
Downsize Your Home
You could consider moving from your home to a smaller one, or to another location where house prices are cheaper. You will need to take into account the price of selling your home, and the associated fees from estate agents and solicitors, in order to make sure the exercise is worthwhile. There are also costs involved with purchasing another home such as stamp duty.
Another option is to consider taking out an equity release plan to enhance your pension income. This enables you to stay living in your current house and whilst making use of some of the money that is tied up in it. You should consult with the beneficiaries of your estate before you commit to any equity release scheme because using the capital in your house might mean that there will be nothing to pass on when you die.