Older savers dangerously unprepared for financial shocks in retirement

Older savers are unprepared for financial shocks in retirement, new research suggests, with only 14% of over-50s factoring care home costs into their retirement planning. Meanwhile, only 16% have considered the impact of a serious illness.

Under-50s are slightly more prepared, with the figures rising to 22% and 25% respectively, but the vast majority are still sleepwalking into retirement without proper consideration of the challenges they could face.

With the average care home costing £60,000 per year, failing to factor this into your retirement planning could leave a black hole in your pension pot. Long-term illness could also add to household pressure – from forcing you out of the workplace earlier than you had planned, to increasing day-to-day costs on things like energy bills.

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“The industry needs to urgently engage and educate people, especially those in their 50s and above,” says Mark Futcher, head of defined contribution pensions at Barnett Waddingham, the consultancy behind the research.

“Pension providers are the most popular place for advice for over-50s,” he adds, “which means they have an urgent responsibility to offer fulsome, understandable, and targeted support”.

The good news for younger savers is that they have a longer investment horizon in front of them, meaning more time to turn their finances around before hitting retirement age. But there are still some simple steps over-50s can consider too, such as filling gaps in their National Insurance record or topping up their private pension.

Four steps to boost your financial resilience in retirement

1) Understand the true cost of retirement

The first thing you should do is build an understanding of how much retirement actually costs. The Pensions and Lifetime Savings Association (PLSA) publishes annual figures showing how much you need for a basic, moderate and comfortable retirement. The annual costs might be higher than you think.

• Basic retirement: £14,400 per year for a single person, or £22,400 for a couple
• Moderate retirement: £31,300 per year for a single person, or £43,100 for a couple
• Comfortable retirement: £43,100 per year for a single person, or £59,000 for a couple

It is worth mentioning that these figures do not include housing costs, so if you are renting in retirement or still paying off a mortgage, you will need an even higher income.

You should also read up on what luxuries (if any) each category includes. For example, a basic retirement doesn’t cover the cost of running a car. This is something many retirees would struggle to live without.

Current recipients of the full new state pension receive £221.20 per week, or around £11,502 per year. The amount increases each year in line with triple lock rules to keep pace with rising living costs. This means single pensioners will need to find an additional £20,000 each year on top of their state pension allowance, if they want to enjoy a moderate retirement.

To buy an annuity which pays this much income each year, you would need to have a pension pot worth roughly £432,000, based on figures we plugged into Legal and General’s online annuity calculator. This would allow you to take £108,000 as tax-free pension cash (your 25% lump sum allowance), before using the remainder to buy the annuity.

2) Top up your private pension

One of the best ways to boost your financial resilience heading into retirement is to top up your pension contributions. The earlier you start, the better. Pensions are highly-efficient savings vehicles – and there are several reasons behind this.

When you pay money into your pension pot, you benefit from tax relief on contributions. This is paid at your marginal rate – so 20%, 40% or 45%. This means topping up your pension comes with greater perks than paying money into an ISA. Just remember that you won’t be able to access your private pension until you turn 55. This is set to increase to 57 in 2028.

Another perk of pensions is that you aren’t taxed on any investment income or capital gains earned within the pension wrapper. This means your pension is more tax-efficient than a regular investment account.

Finally, if you are paying into a workplace pension, your employer might offer to increase their contributions when you make voluntary top-up payments. This is essentially ‘free money’, so it is worth taking advantage of this perk if you can.

3) Ease into retirement with part-time work

If you can’t afford to quit the workplace but want to introduce more balance to your life, semi-retiring could be a good option. This could allow you to make time for other hobbies and interests while still generating an income. Where possible, keep contributing to your pension during this time to benefit from employer contributions and pension tax relief.

If you decide to go down this route, avoid drawing money from your pension pot where possible, as accessing your pension will trigger something called the Money Purchase Annual Allowance.

Once this allowance has been triggered, it reduces the amount of money you can contribute to your pension each year while still enjoying tax relief. Most savers can contribute up to £60,000 per year, but this falls to £10,000 per year once you have drawn from your pot.

If you continue to work past state pension age, you could also consider deferring your state pension. Deferring comes with some potential benefits. Recipients of the new state pension are entitled to claim an extra 1% for every nine weeks they defer. This works out at just under 5.8% extra over the course of the year.

It is worth remembering that deferring is something of a gamble, though. You will only win out financially if you live long enough. We share further details in: “Should you defer your pension and stay in work?”

4) Maximise your state pension

The state pension makes up an important part of most people’s retirement plan. To qualify for the full new state pension, you need 35 qualifying years of National Insurance contributions.

If you take time out of work to look after young children, you are still entitled to the credits. You can claim these by applying for Child Benefit. Some grandparents can also claim NI credits to top up their state pension, if they are looking after their grandchildren. Parents can effectively transfer their NI credit over to the grandparent in question – but this only works if the grandparent is under state pension age, currently 66.

Another way you can top up your state pension is by buying NI credits. Under normal rules, you can fill gaps for the past six years. However, under a special concession, the government is currently allowing people to claim back for the period between April 2006 and April 2018. This concession will come to an end on 5 April 2025 – so you may need to act quickly.

The cost of filling a missing year is currently £907.40 (2024/25 tax year). Buying this will give you 1/35th more state pension – equivalent to around £329 per year. Theoretically, this means you could make your money back within three years.