Everyone wants to spend their well-earned retirement doing what they love without worrying about money. But ensuring you have enough cash to be comfortable can take a lot of effort, discipline and tenacity, especially as we now typically live much longer. A recent study found that Brits need to save on average around £260,0001 over their lifetime to receive a basic income of over £9,0001 a year in addition to their state pension. Even more alarming, people who don’t own their own home will have to save an average of £445,0001 if they plan to pay rent in later life. So, whether you’re 20 or 50, the best time to think about your pension is now! Here’s a short guide to help make your ideal retirement a reality.
1: The Guardian, May 2018 - https://www.theguardian.com/money/2018/may/16/average-person-will-need-260000-for-retirement-says-report
20s and 30s: Develop healthy money habits
Retirement can seem a long way off at this point, but this doesn’t mean you shouldn’t start planning for it. The main thing you can do now is take control of your finances by creating a budget and sticking to it. Start by reviewing your monthly spending, list all your monthly outgoings, from bills and groceries to social budget and holidays. Work out what you spend versus what you save and see if there’s anywhere you can cut down and save. Your first goal should be an easy access savings rainy day fund of around 3 months’ expenses. After that you could look to investing for long-term goals.
If you don’t already, you should think about contributing into your workplace pension scheme or your employer’s pension scheme, as soon as you can. You may well already have been automatically enrolled in your employer’s pension scheme. These can be very generous, with some matching the payments you make up to 5% or more, so it’s worth checking what you’re entitled to. From April 2019, the minimum contribution will increase to 8% (5% for you and 3% for your employer). You’ll also receive tax-relief on your pension contributions So, if you’re able to, you could think about putting in as much as you can to take advantage of the tax relief and give your pension pot a boost
In addition to maximising your pension contributions, you could grow your pot by opening a savings account exclusively dedicated to your later life. You don’t have to put big sums in, you can save small amounts regularly, and setting up a direct debit or standing order from your current account to your savings could help your future wealth build up without you even realising it. If you want to save in a tax-efficient way, you could consider opening a Cash ISA where you don’t pay any tax on interest you earn. One thing to keep in mind though is that your savings can struggle to grow in real terms, unless you manage to find an interest rate that’s above the rate of inflation.
If you’re comfortable taking some risk, you could consider investing to potentially boost your pension and you could choose to put your money in a SIPP (self-invested personal pension*) where you can make your own investment decisions and receive 20% tax relief from the government. This means if you're a basic rate taxpayer and put £800 in a SIPP, or personal pension (read our guide on the different types of pensions for more information on this), the government will add £200, bringing the total value of your pot to £1,000. Now if you do the maths you'll realise that £200 is 25% of £800, so for each contribution you're effectively getting a 25% top-up. You could also consider starting an Investment ISA to potentially grow your retirement pot in a tax-efficient way. The key thing with investing is to consider it sooner rather than later. Remaining invested over many years can typically help you ride out the ups and downs of the market. It can also give your money more time to benefit from compounding, provided the environment is positive. Let’s imagine, you start investing when you’re 36 and plan on retiring at 66. If you put £80 each month in a Wealthify Confident ISA Plan, you could potentially build up a pot of around £53,000 after 30 years. But if you invest £80 each month from the age of 26, you might end up with around £98,000.
*A personal pension is a type of pension that you personally set up and contribute to. It is separate to a workplace pension or the state government-funded pension. It can be used to complement any existing workplace pensions you have and gives you greater flexibility over how you invest.
40s and 50s: Save more and start planning your later life
If you haven’t started putting money aside yet, it’s not too late. It may well require more effort to reach your goal than it would have had you started in your 30s but acting now is better than doing nothing. Consider all the pension options available to you. If you’ve already started saving, you could consider increasing how much you put into your workplace pension, savings account, SIPP, or Investment ISA. In your forties and fifties, your financial situation is likely to be in better shape, since your pay may be reaching its peak, and you may be closer to settling debts like your mortgage.
In addition to maximising your savings, you could start drawing up a retirement plan. There are many things you can already decide on, such as the age you’re intending to say farewell to a working life and the monthly income you’d like to have by then. Make sure to review what you already have saved for your retirement by checking how much is in your pension, savings account(s), SIPP, and any other investment plan you might have. This will give you a realistic picture of your situation and help you make plans.
Until 2028, you’ll be able to access your workplace pension and withdraw as much as you want at the age of 55 – from 2028, the minimum pension age will increase to 57. When you decide to start using your pension you can take out up to 25% of the value as a cash lump sum without paying tax
60s onwards: Make the big decisions
Your hard-earned rest is approaching and the time to make important decisions has come. Now is the time to find out exactly what you can expect: request your state pension forecast to see an estimate of how much you’ll receive and when, ask your pension provider(s) for statements and have a look at your savings account and investment plans. Add up what you’ve got and then decide if you want to have your pension pot handled by an annuity provider to get monthly payments for the rest of your life, or you’d prefer to leave your money invested and take part of your pension regularly as an income. There are different types of annuities available, including a lifetime annuity, which guarantees income until you die, or a temporary annuity giving you regular payments for an agreed period. Whatever annuity type you go for, it’s important to shop around and compare providers to get the one that suits your needs.
After choosing the way your pension income will be paid, you could create a budget for your approaching retired days. By now, you should have a clearer idea of our future expenses (e.g. bills, taxes, insurance, memberships, social and leisure activities), so list them and see how much they’ll cost you approximately. What you have left could serve to make your retirement dreams come true whether it’s travelling, renovating your home, or splashing out on your nearest and dearest.
The projected values in this blog show possible future values for a Confident Plan. These are only forecasts and not a reliable indicator of future performance.
The tax treatment depends on your individual circumstances and maybe subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.