Pension warning as Britons could run out of money – state pension an ‘essential backstop’

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Contrary to popular opinion, spending in retirement does not generally fall – a new study has shown. As a result, people who are planning their retirement will need to think carefully about their income.

The study by the Institute for Fiscal Studies (IFS) has warned that as speeding does not fall as people age, there could be challenges during the cost of living crisis.

However, because the amount of state pension people receive typically rises each year, there may be a way to take less from a private pension to cover living costs. 

The state pension triple lock was temporarily frozen this year, and the 3.1 percent increase did not keep pace with rising prices.

This, in turn with the reduced value of private pensions could have a negative impact of retirement income.

READ MORE: State pension gap narrows but women still need to take action

Many individuals believe they won’t want to go out as much, or go on as many holidays.

However, even if this is the case, Ms O’Connor warned of unexpected costs which can often arise in later life. 

As a result, Britons are likely to need to plan ahead to make sure they have enough to see them through their later years.

Ms O’Connor continued: “If people end up spending more than they expected as they age, there is a chance they could exhaust their pension pots too soon.

“These findings suggest that people should err on the side of caution and plan as though they will always need the same amount of income each year, rather than that spending will go down dramatically, taking into account rises in the state pension they will receive over time.”

The state pension, however, functions as an “essential backstop” for those who need it in retirement.

The full new state pension sum is currently worth £185.15 per week, working out as over £9,000 per year.

It can provide another important source of income for individuals once they have left the workforce.

Ms O’Connor added: “This research reveals how important the triple lock is to allowing retirees, who reach retirement age with an average of £132,464, to manage their living costs in later life.

“The report may also support the case for a comeback for annuities, which pay a guaranteed income for life, but have fallen out of favour for over a decade as low rates meant they are often seen as an unpopular option.”

The report has also warned future generations of retirees may be set to spend even more.

When people were born will make a huge difference to the retirement income they can expect.

Heidi Karjalainen, research economist at IFS, added: “While average pension incomes have grown strongly with age in recent years, leaving many retirees with more resources than they chose to spend, high inflation is reducing retirees’ spending power and – along with the more uncertain outlook – makes careful financial planning all the more important.”

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