A guide to planning for retirement

Saving for things like a wedding or a house often take priority over saving for retirement, because retirement can feel so far away that we think we don’t need to worry about it yet…but we do!

When should I start planning for retirement?

The simple answer is the earlier, the better.  You should start planning for your retirement as early as possible. The earlier in life that you start contributing towards your pension, the less pressure there will be on you when you’re older to contribute a high percentage of your salary.

Here is an example:

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Interest: When you save money, you earn interest. Each year, you’ll earn interest on the total amount in your account – including the interest you’ve earned, not just the money you’ve contributed.

How much money do I need in my pension to comfortably retire?

The only way to answer this question is to think about the type of lifestyle you would like once you’ve retired. There is no right or wrong answer.

At the moment, you may be budgeting each month to cover your bills (such as rent or food), your social activities (such as eating out, holidays or shopping) and then if you have cash left over, considering what you can afford to save towards your bigger goals.

Once you’ve retired, your budget will change. You might not have a mortgage anymore, but you might also have less disposable cash for your social activities, so it’s really important to think about what kind of lifestyle you’ll be happy with so you can enjoy your retirement.

The Retirement Living Standards, based on independent research by Loughborough University, have been developed to help us to picture what kind of lifestyle we could have in retirement.

The Standards are split into three lifestyles: minimum, moderate and comfortable. Roughly speaking, a single person will need about £10k a year to achieve the minimum living standard during retirement, £20k a year for a moderate retirement, and £30k a year for a comfortable retirement.

The Standards predict that a single person living a minimum lifestyle could afford a one-week holiday, plus a long weekend in the UK and spend £460 on clothing for themselves each year. In comparison, someone living in the comfortable lifestyle category could afford to spend up to £1,500 on clothing and afford three weeks away in Europe.

It’s difficult to think about how you want to live in retirement now, but it’s good to get an understanding of the lifestyle you’re heading towards at your current savings rate. If you act now, you can drastically change your standard of living in retirement.

What do I need to do to plan for retirement?

For most people, your retirement funds will come from three different sources; the state pension, your workplace pension and then any private pensions, savings or other investments, so to start planning for your retirement, you need to consider the value of each.

Know what the state will give you

The state pension will currently give you a maximum of £185.15 per week, but not everybody will get the full amount.

Make the most of your workplace pension

If you are employed, your employer is required to automatically enrol you on a workplace pension where a percentage of your pay is put into a pension scheme automatically every payday. In most cases, your employer also adds money into the pension scheme for you – free money!

You can often increase your contributions to your workplace pension, which would mean the money came out of your wage slip rather than your after-tax take-home pay, and workplaces often match or increase their contribution, too.

Take notice of previous workplace pensions and their fees

It's quite common for people to ‘lose’ a pension. For instance, when you were given a workplace pension many years ago and can no longer find the details of your pension account. But, did you know that you get charged a fee for a company to manage your pension, even when you’re not contributing to it?

If you had a pension pot ten years ago from an old employer with £5,000 in and had not contributed to this pension since you left that company, for the past ten years the pension provider will have been charging you a fee for managing this investment. This money comes straight out of the pension pot itself and if not monitored regularly, the fee could increase and impact your investment returns.

So, to make the most of pension pots you have already earned, the Government have a service you can use to track down any lost pensions you may have. Once you have found all of your previous pensions, you can have your pension pots reviewed for free by one of our financial advisers. They will look at all your pension pots, your fees, the returns they’re making and see if it would be financially better to consolidate and transfer them. That way, you’ll know you’re doing everything you can to maximise your workplace pensions.

Private pensions

If you’re self-employed, you can open a private pension yourself. Whilst you won’t receive contributions from elsewhere, you will still receive tax benefits, just as if you were working for someone else.

Basic-rate tax payers will receive 20% tax relief and tax payers in the higher bracket will receive 40% tax relief. If you don’t pay any tax, you can still reclaim tax relief but your annual pension allowance is restricted to £3,600.

So, for example, a basic-rate tax payer will have been taxed £20 on every £100 they earn, leaving them with £80 after tax. If they then contribute this £80 to a pension, they will be reimbursed £20 in tax relief, giving them back the tax they paid on that £100.

Your annual pension allowance is usually up to £40,000 per year. If you contribute more than £40,000 into a private pension and breach your annual allowance there may be tax penalties as a consequence.

Speaking to a financial adviser for free would help you determine whether you should open a private pension.

Investing for your future

In its simplest form, investing is when you buy an asset (traditionally a share of a company) at a certain price, hoping that the value of it increases over time. If the asset increases in price, the buyer can sell the asset and make a profit. However, the asset may also fall in price, and if it is sold at that price, the buyer would lose money on their investment.

Investments can take on different forms, such as, you may have purchased a house or you may have opened an ISA, or even invested in some stocks and shares yourself.

With any form of investment comes risk, but it is worth speaking to a qualified financial adviser to see if investing would be a good option for you to build up your funds for retirement, either in conjunction with private and workplace pensions or in replacement of.

Remember, capital is always at risk when investing.
Fees correct as of 20/04/2022 and may exceed the stated value.

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