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How to Maximise Your Retirement Income

An alarming number of baby-boomers are failing to save for retirement - and too many are relying on cash to deliver growth. So what can be done to maximise your pension?

Emma Wall 27 January, 2015 | 7:20AM
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Emma Wall: Hello and welcome to the Morningstar series, 'Ask the Expert.' I'm Emma Wall and here with me today is Tony Stenning, Head of UK Retail for BlackRock.

Hello Tony.

Tony Stenning: Good morning, Emma.

Wall: So, we're here today to talk about the latest Investor Pulse survey. This has basically looked at people's attitude towards pensions and the changes coming in in April with retirement. What are people saying they are going to do?

Stenning: This is really interesting, Emma. We've interviewed over 2,000 people in the U.K. That's part of we think the world's largest actually Investor Pulse and it's really testing what people are and their attitudes are. What it's told us is that probably just spending a few minutes here, the baby booming kind of generation, the 55 to 74-year-olds was they recognise that the State is not going to be there for them. They are not really ready for retirement. In fact, four out of 10 of them aren't specifically saving for retirement.

Wall: One of the most alarming stats for me looking through the numbers was that some people are saying they are going to take all of their money out at retirement, which they are allowed to with the new rules, but put it into cash.

I was just looking at the figures, at the moment the most you can get on a cash account, 2.5% if you lock it away for five years, that's from Virgin Money. Or if you want easy access, just 1.4% from the Post Office. I mean, that's not really going to help them grow, help them beat inflation in the long term?

Stenning: Absolutely right, Emma. This is a real challenge. So, great news come April, much more flexibility and you can get much more access to your money, fantastic. Challenge is that that comes with a huge amount more sort of responsibility and I think people just aren't necessarily ready for that. If you look at their assets right now outside of the pension, two-thirds of that sitting in cash despite the fact that we've had pretty much, you've just articulated, and they are better than interest rates have been for a little while, I mean, pretty zero for the last sort of five plus years. But yet, still people want that safety blanket and they are not understanding really that that cash machine isn't working.

So, our concern is, as you rightly said, that 1 in 10 when they get to post-April are now going to go, I'll take my cash because it's my cash and I'll put it into a bank account because I want to maintain the pound, I want to maintain the certainty of the outcome, but the challenge is, you rightly said, with interest rates where there are and although inflation is falling, that's still eating away the purchasing power of their money.

Wall: This sort of separation between concept and reality seems to be a theme throughout the survey. I was looking at the income people would say they ideally like in retirement and that's around £23,000. But when you asked how much they thought they would need to provide that income, they said around £304,000 and actually, it's around £441,000. So, that's quite a difference.

Stenning: That's: ‘Mind the Gap’ as you find out on the tube. I mean, there is a huge sort of a reality misconception here. A lot of that is to do about not thinking sort of over the long term as perhaps they should and not getting their savings away early enough and working as hard as you possibly can for you. I think that's where you get this gap of reality. I think people's mindsets haven't really readjusted to this new world that we live in with much lower rates of interest, much lower rates of return that you can get from these so-called safe heaven assets. So, that's going to come up perhaps as a bit of a unwelcome wakeup call for people, come post sort of April next year.

Wall: We have talked a little bit about the problems; being aware that cash really isn't going to deliver real returns after inflation and be aware of the fact that you actually probably need to save quite considerably more if you're going to get your target income in retirement. But what about solutions? I mean, what could people be doing now to help mitigate those risks?

Stenning: So, there are a few things they can do. This is a good news. The real challenge here though that what they recognise that the state is not going to be there to be the backstop for them, particularly now and also post-April, 8 out of 10 of them don't know where to go to get income-generating assets. It's a worrying statistic there and that's really important because the earlier you can start investing, the more that you can let your money get out, as I said earlier, and work for you, the more chance you really have when you hit that retirement age whenever that is and I think people are going to go into this sort of semi-retired state for a few years, because the more you can draw down your pool, the longer you can make that work for you, the better you'll be.

So, I think we asked this population particularly, if you could get in the DeLorean, go back in time and see your younger self, what would you say? And they said three things. Firstly, they would take a much longer-term view, i.e., don't leave it all in cash. I think that's probably the English way of saying that.

Secondly, they would invest regularly and review their plan regularly. And thirdly, if they could, they would try to keep their debt under control. That's really important because what we've identified is there is strata of savers across every age group that do exactly that and they are generally better off than the average Brit.

If you can do that you are also twice as confident and in control of your financial future because you're more engaged. So, I think that's something you can definitely learn from yourself. Don't make the same mistakes.

Wall: Ideally, we would be doing that at 20, 30, 40, but actually because we're going to be retired for quite a long time, it's not too late to start employing those strategies at 50, at 60?

Stenning: It really isn't. I think even in that age group, the 55 to 74, you're getting towards the – it's starting to get a little bit late in a day, but definitely not. At that 55, 65 age, I mean, you've still got a number of years to make your pot work for you. Even as you're approaching sort of the upper end of that going into this sort of semi-retired state, gradually reducing your hours, letting your money pick up the slack perhaps from your actual work, let your money do the work for you and pick up that difference.

Wall: Tony, thank you very much.

Stenning: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Wall  is former Senior International Editor for Morningstar