Can you afford to retire in 2024?

From interest rates to inflation and the economic climate, there are plenty of factors to consider if you plan to retire this year – here is how to prepare

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It is an interesting time to retire this year with high interest rates and the prospect of a new government weighing on pension pots and stock market performance, but what are the prospects for retiring in 2024?

Rising interest rates have provided a boost for people choosing to take an annuity to help fund their retirement, but it has been less certain if you have stayed in drawdown, leaving you at the whims of market uncertainty.

Older investors who are considering retiring will be wondering when interest rates will be cut and if they can still pay the bills even amid slowing inflation.

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The UK economy may have come out of recession, but the general election provides new uncertainties over how the next government's policies could hit pension pots.

We consider the factors that could make 2024 a good or bad year to retire.

How the general election could affect your retirement

The main political parties are still putting the final touches to their election manifestos but there are already hints at what a future Conservative or Labour government could mean for your pension.

The Tories this week unveiled plans to increase the personal tax allowance for pensioners in line with the triple lock.

Rather than just using the triple lock to calculate state pension increases, the triple lock plus would also raise the tax allowance for pensioners by the same amount so they can keep more of their income.

Additionally, while the current Conservative government has scrapped the pension lifetime allowance that previously limited how much you could save in total through your retirement pot, Labour has suggested that it would bring this back.

The return of the lifetime allowance could create uncertainty for higher earners about how much to put into their pension and to ultimately save for their retirement.

Make use of the state pension

Pensioners have already been boosted by a rise in the state pension since the start of the new tax year in April.

It increased from £203.85 to £221.20 from April 2024 or to £11,500 per year.

This is a decent sum but it is below the £43,100 per year that the Pension and Lifetime Savings Association estimates a single person will need for a comfortable living standard in retirement.

So you are likely to need more sources of income.

Annuity rate revival

Annuities have long-been ignored by retirees due to poor rates.

But annuity rates have become more attractive as pricing rose in response to rising interest rates and gilt yields over the past year or so.

Research by Hargreaves Lansdown shows a 65-year-old with a £100,000 pension could now get up to £7,149 per year from an annuity – a massive 44% increase on the £4,953 they could have got two years ago.

Opting for an annuity while rates are high could give you a decent guaranteed income throughout your golden years plus you could even link it to inflation.

“Annuities are certainly more of an option than they have been at any point in the last decade and we are having more conversations about these,” says Joshua Gerstler, chartered financial planner at The Orchard Practice.

However, rates could drop if the Bank of England reduces the base rate, as expected, in the coming months.

A flexible retirement option

While annuities provide certainty, you may miss out on investment growth and the ability to access the funds as and when you please.

Many analysts are expecting an uncertain year, with expectations of low levels of economic growth.

Retirees may favour more flexibility during uncertain times by keeping their pension pot invested so they can access more money if needed or leave the rest invested.

Using pension drawdown provides an option to do this.

But the main issue with accessing your pot is timing.

“Many approaching retirement will have watched in horror in 2022 as both stocks and bonds - the two assets most likely to comprise the bulk of pension pots - fell in tandem,” says Ed Monk of Fidelity International.

“High inflation and high interest rates combined to push both assets lower - particularly painful if you know you’ll soon need your pot to start generating an income."

The question is whether pension savers can make up any losses before they retire.

Monk highlights that a fund made up of 60% equities and 40% fixed income assets lost more than 15% between the market high at the start of 2022 and the low in October of that year and still remains 9% below its peak.

It is important to consider how much you take out of your pension pot each time to ensure you don’t run out of money.

That may be more tricky with inflation still relatively high at 4.6% and energy bills set to rise again in the new year.

One often cited method is the 4% rule.

This suggests retirees withdraw 4% of the value of their pension fund in the first year of withdrawals and increase that by the rate of inflation each year. This is supposed to last a typical retiree 30 years.

Believe in buy-to-let?

Investing in the property market has traditionally been seen as a viable option for people to fund their retirement.

Buy-to-let landlords have benefited from low levels of supply and record high rents in recent years.

But there are warnings that affordability pressures and reduced demand could mean rental growth slows this year, hitting the retirement plans of many.

For example, Zoopla estimates that UK rental growth will halve to 5% by December 2024.

Many landlords are also exiting the sector due to restrictions on tax reliefs while higher buy-to-let mortgage rates may also hit property investing profits.

 The key factor, whatever way you are funding your retirement, is planning

“The plans we build for our clients make the assumption that the year they retire will be a ‘difficult’ one, ie. in the midst of a stock market crash or some other crisis,” says Ross Lacey, director at Fairview Financial Management.

“Using this kind of approach means we have an all-weather strategy for dealing with external factors outside of anybody's control, and our clients have more confidence they can still do what they want.”

Marc Shoffman
Contributing editor

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.