Retirement planning has changed significantly in recent decades. Fifty years ago, an individual spent 23% of their adult life in retirement. Today, that figure is up to 33% due in part to a longer life expectancy.
As a result, the State Pension age is set to rise to 68 over the coming decades, with the pace of increase likely to pick up as life expectancy rises. This could mean that the State Pension becomes even less adequate when it comes to funding an individual’s retirement, with the current amount of just over £8,500 per year being around 30% of the average salary in the UK.
Flexibility
While the prospects for the State Pension may be deteriorating, the opportunities available to individuals who wish to plan for their own retirements seems to be improving. The introduction of the Lifetime ISA has provided an extremely simple means of saving for retirement, while the ease of investing in the FTSE 100 could mean that the long-term financial prospects for a number of people have improved.
A Lifetime ISA is made up of contributions from post-tax income. For many people, this makes the task of planning for retirement much easier, since any amounts withdrawn after the age of 60 are not subject to tax or any financial penalty. This could make it easier to determine the potential level of income that is available in retirement, while a lack of tax on withdrawals means that the tax-avoiding appeal of a traditional pension is offset to a large extent.
Investing potential
Investing through a Lifetime ISA is very similar to buying and selling shares in a standard sharedealing account or ISA. A large range of stocks and shares can be purchased, which allows an individual to tailor their portfolio to their own specific needs. In contrast, a number of private pensions (especially employer pension schemes) are somewhat limited in the options available to an investor. In many cases, a handful of funds are all that is available in such schemes, which does not provide an investor with the same opportunity as a Lifetime ISA to outperform the market.
At the present time, there appear to be a number of shares in the FTSE 100 and FTSE 250 that could offer impressive growth prospects. For investors close to retirement, obtaining a 5%+ dividend yield is not particularly challenging right now. For investors with a longer timeframe, a range of shares continue to offer growth at a reasonable price despite stock markets having enjoyed a 10-year bull market.
Takeaway
While the prospects for the State Pension may be relatively downbeat, products such as the Lifetime ISA could offer individuals the opportunity to take control of their finances in retirement. With a simple structure and a large amount of flexibility, they could provide an impressive level of return over the long run. That’s especially the case since the FTSE 100 and FTSE 250 appear to offer a number of sound investment opportunities.