The way we access our pension is now a lot more flexible and it’s no secret that in the UK we’re living longer than ever before.
Exactly how much you will need for a comfortable retirement will depend largely on your cost of living and lifestyle choices. For many people, retirement is about sun-soaked holidays, enjoying your favourite hobbies and maybe even investing in that luxury item you've always coveted.
However, retirement is not what it used to be. With more of us working longer to build up our desired retirement income it is essential to assess how much you’re saving into your pension if you want to make your own vision a reality.
The simple truth is the earlier you start, the easier it will be. If you have less time to invest then the amount of money that you have to save is likely to be higher to make sure your retirement planning is on track. Even if you begin saving late or have yet to begin, there are steps you can take to increase your retirement savings.
Here are some things to think about as you start to build your retirement plan:
- The age you’d like to retire
- How much you will likely need in retirement
- Any savings, investments or other assets that you could add to your retirement income
- How your living expenses could change in the future
- Paying off any debts before you retire
- How you’ll support your dependants once you’ve retired
- Putting money aside to pay for long-term care for you, your partner or other dependants
Make sure your goals are on track
Working out what pensions you already have should be a starting point for your retirement plan. Locate the latest statements you have for all your pensions, including from previous employers and personal pensions.
You should be sent an annual statement for each of your pension schemes, including any employer-based arrangements and personal pension plans, even if you are no longer contributing to them. However, if you don’t have up-to-date statements, you can ask for these to be sent to you. If you are unsure of what you’ve got you can trace any lost pensions through the Pension Tracing Service.
Valuing your pension
As well as telling you what your pension is worth now, annual statements will also detail what your pension might be worth at retirement. These forecasts (don’t think of them as anything more than rough estimates) will be based on a range of assumptions including investment growth and inflation between now and retirement.
It is important to consider the effect of inflation because, over time, this can significantly reduce the spending power of your pension.
Cost of your lifestyle
Whether your pension will be enough to pay for the retirement you want will depend on the savings pot you amass, as well as the cost of your lifestyle when you retire. Working out what income you will need in retirement may not be straightforward. Your life in retirement will be different from your working life; some costs may go up, while others will reduce.
You may spend more on holidays and leisure (especially in the earlier years of retirement), but your housing costs may be lower. While you may no longer have the costs of bringing up children, you may still want to help them financially and there could be grandchildren to think of. In your later retirement years you could have care costs. The traditional rule of thumb has been a target pension income of two-thirds of your salary.
With the advent of Pension Freedoms, consider phasing your retirement fund while continuing to work part-time for your current employer.
Know your magic number
Having accounted for the State Pension and any defined benefit scheme pension, you need to calculate how much money you will need to save to produce the remainder of your target income. This can depend on factors such as the age you want to retire, income yields available on investments, how much prices rise during your retirement and how long you live for – and how much you have put aside already.
If you contribute through a workplace pension, your employer will also contribute on your behalf, and you could qualify for National Insurance savings using a so-called ‘salary sacrifice’ arrangement. Employer top-ups, in particular, can significantly increase the value of your pension contributions, so it is worth checking that you are making the most of any workplace generosity offered.
It’s also important to be aware that there is a limit on the size of overall pension savings you can accumulate – currently £1.03 million (for 2018/19, and rising annually in line with inflation) – without facing a hefty tax charge of up to 55% on the excess.
Alternative wealth opportunities
Pensions are not the only way to save for retirement. Tax-efficient Individual Savings Accounts (ISAs) are a popular savings option, while many people see property – particularly in the form of buy-to-let – as their retirement nest egg.
Seize the day – today
When you are living a busy life, it can be difficult to find time to consider your long-term plans. Your mortgage or your children’s education might be more immediate financial priorities; your career or running your business can make more pressing demands on your time.
However, getting your pension on track as soon as possible could save you a financial headache later on.
Another reason to take advantage of existing pension tax breaks is that there is no guarantee they will be there in the future.
The Government has already cut the annual allowance to £40,000 – and as little as £10,000 for very high earners – while reducing the lifetime allowance from its £1.8 million peak in 2011/12. Higher-rate Income Tax relief on contributions could be next, so it makes sense to make the most of what’s on offer now.
Reaching your wealth goals
Whether you are new to pensions or have ten years, five years or six months until you plan to retire it is important to meet with a professional financial adviser for advice on the best retirement options for you.
To discuss your situation, contact our Independent Financial Advisers on 029 2066 0565 or email us at email@example.com.
The tax legislation and regulation in this article is based on our understanding of the current 2018/19 tax laws and HM Revenue & Customs’ practice, which is subject to change.