The gap between private and public sector pensions is widening, research suggests. If you work in the private sector, it’s crucial you understand how your pension decisions could affect your retirement lifestyle. Financial advice could help you overcome some key challenges.

The pension gap is largely attributed to the fact that public sector workers are more likely to have a defined benefit (DB) pension, while most private sector employees will have a defined contribution (DC) pension.

While public sector workers with a DB pension often need to contribute a higher proportion of their income when compared to the minimum amount for DC pensions, employer contributions are typically more generous. As a result, they may end up with a significantly higher income in retirement.

According to research published in This Is Money, the typical private sector worker could get as little as £1.75 for every £1 they set aside for retirement. In contrast, public sector workers can get as much as six times that amount, although this will vary depending on the pension scheme.

On top of this, DB pensions offer greater financial security in retirement.

If you have a DB pension, your employer or pension scheme will be responsible for providing you with a guaranteed income from your retirement date for the rest of your life. The income from a DB pension is often linked to inflation to maintain your spending power – in April 2023, public service pensions benefited from a 10.1% increase due to high inflation. So, you have an income you can rely on throughout retirement.

In contrast, with a DC pension, you’ll retire with a lump sum held in a pension. It is then your responsibility to decide how to use it to create an income for your retirement.

So, not only could private sector employees end up with smaller pensions but they face decisions that could affect their financial security for the rest of their life.

Financial advice could help private sector employees make the most out of their pension contributions and feel more confident about their retirement.

3 of the pension challenges financial advice could help you understand

1. How much should you save during your working life?

One of the big challenges of saving through a DC pension is understanding if you’re doing enough to secure the retirement you want.

It can be difficult to understand how the contributions you make will add up, and what they would mean for your future income. A financial planner can use cashflow modelling tools to help you visualise how your pension could grow throughout your working life. It can highlight a potential shortfall and allow you to adjust contributions if necessary.

When understanding if you’re saving enough, you’ll need to consider areas like life expectancy and how much income you need in retirement.

As well as assessing your pension contributions, a financial planner could help your money go further by ensuring you’re claiming all the tax relief you’re entitled to and that you’re investing your pension savings appropriately.

2. How should you access your pension to create a sustainable income?

When you have a DC pension you can decide how to access the money, but you need to think about how you can create a sustainable income. There are several different options, so it’s important to weigh up which one is right for you. Among the options are:

• An annuity is something you purchase, which will then deliver an income for the rest of your life. So, it can create financial security in retirement. You may choose an annuity that increases each year in line with inflation.
• Flexi-access drawdown allows you to take an income from your pension that you can change to suit your needs. The money you don’t withdraw will usually remain invested with the aim of delivering long-term growth, but this also means it’s exposed to investment volatility and risk.
• You could also choose to withdraw lump sums from your pension as and when you need to.

You don’t have to choose a single option – you can mix them to create an income that suits your needs.

The decisions you make when deciding how to access your pension can affect you throughout retirement. Financial advice that’s tailored to you could help you create a sustainable income you can feel confident in.

As a financial planner, we can also help you understand the Income Tax you may need to pay when accessing your pension, and how to use other assets to support your retirement goals.

3. How can you manage the rising cost of living?

It’s not surprising that the cost of living crisis is a major concern for retirees and those planning their retirement. High inflation has demonstrated why retirees need to consider how their income needs will change.

Over a retirement that may span several decades, the cost of goods and services could rise. If you haven’t factored this into your pension decisions, you could face a shortfall in your later years. In fact, according to Unbiased, 75% of Brits fear the cost of living crisis will affect their retirement.

Even when inflation is lower, a steady increase in prices adds up. So, it’s something all retirees should consider.

There are several ways you could incorporate inflation into your plan. For some retirees, an annuity that is linked to inflation could provide peace of mind, while others may prefer to invest a proportion of their assets throughout retirement. There are other options too. A financial planner can help you understand which ones suit your priorities and concerns.

Contact us to arrange a meeting

It’s never too soon to start thinking about retirement. If you have any questions about your pension and how you could create financial security once you retire, please contact us to arrange a meeting.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.