Many of us look forward to a comfortable retirement, with time for holidays, friends and family and hobbies. Worryingly though, research suggests that around a fifth of UK adults – and 17% of over-55s – admit to having no private pension. There are many reasons for this but, no matter your circumstances, it’s important to consider the benefits of paying into one. Even if you’ve been putting it off for a long time, our guide will help you get started so you can look forward to the future with confidence.
In short, it is never too early to start planning your retirement income. The sooner you start paying into a pension pot the better, since the state retirement pension amount is relatively modest.
The simplest way to understand this is to think about the end goal and work backwards. Most advice about building a pension pot is to start with a target for the final figure available when you retire, so you can work out how much to save each month, and for how long, to achieve that.
The later you start, the less time you have to hit your retirement goals, and the more you will have to pay each month to reach them. By starting early there is less pressure on you as you are saving.
Having said that, many people do not start seriously thinking about setting up a personal pension until they are in their 30s or 40s. This does not apply to a state pension, which, as long as you are building up a record of National Insurance contributions, is automatic.
In addition, a workplace pension is deducted from your salary at source, as long as you don’t opt out, which generally speaking, is not a good idea. Under the pension auto-enrolment rules, introduced in 2012, employers are obliged to set up a workplace pension for you and contribute to it on your behalf.
Once you’ve decided to start investing into a pension plan, the next step is to establish how much you can afford to save into it. Then, it’s a good idea to set clear goals about how much you want to draw as a retirement income and at what age you would like it to start.
It’s helpful to know how much of the total amount of retirement pension income you would like to have coming into your bank account each month. If you are planning to retire earlier than your state pension age, you’ll need to have enough income and/or capital available to tide you over until the state pension starts. For most people, retiring after 2026, this will be age 66 or later. The state pension age for men and women will increase from 67 to 68 between 2044 and 2046.
Setting up a pension itself is relatively quick and easy. But there are lots of things to consider especially if, like most people, you aren’t an expert in financial services. Always shop around and establish all the options available to you before committing.
There are many sources of advice for anyone looking to build a retirement income. Both pensions providers and financial advisers offer a range of services. Advice should be based on your own personal circumstances, your age, your income and so on. You should expect to pay a fee for expert advice however, high quality financial advice can be really helpful and profitable to you, especially over the longer term.
MoneyMinder has produced a comprehensive guide to retirement planning accompanied by online tools and resources. We also have expert, independent financial advisers on hand to answer any questions you might have and to help you make informed choices.
There are lots of useful websites and tools out there to help you work out how much to save and how much you can expect to draw from your pension when the time comes.
A good place to start is Money Helper’s pension calculator, which will give you a forecast of how much you will earn depending on how much you start putting away now.
Advice on how much to put away and when varies. A good target is to have saved three to four times your current earnings by the age of 40, and 10 times your final salary by the time you reach state pension age – currently at 67. So someone earning £30,000 at the age of 40 would be doing well to have saved around £100,000 and well on track for a comfortable retirement.
Calculating how much you need to pay in each month while you earn is complex and depends on various factors. Of these, perhaps the most important is what sort of lifestyle you intend to have post-retirement. Another key consideration is about how you will draw an income from your pension when you retire.
Broadly speaking there are two options. The more traditional route is to take the total amount you have saved up in a pension fund – which, while you are working and saving, is typically invested in stocks and shares – and to then buy an annuity from an insurance company with the accumulated fund.
An annuity provides retirees with a guaranteed income, normally for life, in exchange for the capital sum that has been saved into the pension plan.
The low interest levels we have experienced for many years now mean that annuity rates – the amount of income you get per £1,000 of capital spent – have been low for a long time. That’s made purchasing an annuity with a pension fund much less popular in recent years. However, an annuity can be the right thing for some people, especially those that don’t want to keep their pension plan invested over the longer term and would prefer instead to have a guaranteed, regular income to be paid to them instead.
Due to low annuity rates, a popular route for many retirees since April 2015 has been to keep their pension plan invested and move into an option called drawdown, also known as ‘flexible access drawdown’. This allows the pension owner to draw down an income in a flexible way while providing an opportunity for the pension fund to keep on growing over the longer term. The various pros and cons of each option are discussed in detail in a separate blog.
The route you choose will not only make a difference to your long-term retirement income strategy, it could also make a huge difference to the income tax you pay in retirement and your beneficiaries on your eventual death. Either way, the priority while you’re working is to save as much as you can, to give you options later in life.
The government has published an extensive guide to pensions planning, including links to free sources of advice to get you started. And Money Helper offers a step–by-step guide and checklist for anyone planning to begin saving for a pension, including a retirement budget planner.
Please be aware these articles are for general information purposes only and correct at time of printing. We will not accept responsibility for any errors made or actions taken by any readers that have acted on the information contained. Answers given are for guidance only and specific advice should be taken before acting on any of the suggestions made. All information is based on our understanding of current tax practices, which are subject to change. Always remember when investing, past performance is not necessarily a guide to future performance and the value of some investment units can fall as well as rise.
