Planning for retirement can feel daunting, but if you want to make the most of your later life, it could be worth getting everything sorted out sooner rather than later. Here are eight tips that could help you boost your financial future.
Develop healthy saving habits
Before you start saving for retirement, it’s important to be in a good place financially. If you’re struggling to make ends meet, planning for later life may not be the most pressing thing you’ve got to do. Instead, you may want to take back control over your finances. How do you do this, you ask? Well, there’s no magic formula, but reviewing your spending habits and making cutbacks could help. Also, if you’re serious about getting your finances in order, it could be a good idea to start creating an emergency fund for unexpected costs. If you can’t afford to save big lump sums, that’s absolutely fine. Making small payments regularly to your savings account could help you build up a decent rainy-day fund.
Determine your retirement needs
Once you’re ready to save for later life, make sure you consider your future retirement needs. Where will you be living? Will you be renting? What kinds of expenses will you be paying? Will you travel abroad? How often? What will you spend money on? And how much will it be approximately? All these questions could help you determine the annual income you’ll need during your golden years. Of course, it’s not an exact science, and you’ll always be able to refine your estimate down the line. But calculating how much you’ll need for later life could give you an idea of how much you’ll need in your retirement pot. And the amount of money you’ll need in your pension will likely depend on how much you’re aiming to get in annual retirement income and how long your retirement life could last. For instance, let’s say you want an annual income of £20,000 and you plan on waving goodbye to your working life at the age of 67. Assuming you live until 82, you’ll need about £300,000 in your pension pot by the time you retire.
Check your state pension
When planning for retirement, it’s always a good idea to check where you are with your state pension. If you’re employed and earning over £166 a week, your company should be paying in your national insurance contributions out of your salary. To get any state pension, you’ll need to pay contributions for at least 10 years. If you want to receive the full state-pension, you’ll need to make contributions for 35 years, and you could expect to receive £9,110 a year when you retire1. So, make sure you’re on top of your national insurance contributions and if you have any gaps, find out if you’re eligible to pay voluntary contributions, that way you could boost your state pension.
Take advantage of your workplace pension
If you’re employed, you should automatically be enrolled to your workplace pension. Since April 2019, you’re required to contribute at least 5% of your salary, and your employer will top up by paying a minimum of 3% of your pay. So, make sure you’re enrolled and keep track of your contributions. Also, if you’re in a strong position financially, you could choose to increase your contributions to help your pension grow a little bit faster.
Consider investing in a personal pension
Having a state pension and contributing to a workplace pension will help you take control of your retirement, but it’s also important to consider other options if you want to give your retirement pot a little boost. You could for example open a personal pension. Also known as SIPP (Self-Invested Personal Pension), a personal pension gives you more control and flexibility over your pot. With a SIPP, your money could be invested in a large range of investments, such as shares, bonds, and commodities, and you’ll receive tax relief on your contributions. For each pension contribution you make, you will receive a 25% top up. Put simply, if you’re planning on investing £100 in your SIPP each month, you’ll only need to pay in £80 since the government will add the remaining £20. One thing to keep in mind though is that the amount you can invest tax-efficiently is limited. Currently, the limit is set to £40,000 or 100% of your earnings (whichever is lower) – this pension allowance is the combined contributions made by you and the government. If you contribute more in your pension, you may need to pay tax on the excess. On the other hand, if you can’t use your whole SIPP allowance, you’ll have the possibility to carry it over the next three years, as long as you meet two requirements. Not only do your earnings need to be at least equal to the total amount of your contributions, you also have to be a member of a registered pension scheme. Whether you’re salaried or self-employed, SIPPs are a great option if you want to get on top of your retirement.
Getting started with a SIPP, or personal pension, is easier than you might think. You can invest in a SIPP, even without much financial knowledge or experience. We live in exciting times where digital investment services let you save for retirement without hassle. At Wealthify, we do the hard work for you, from building your pension pot to adjusting it, when needed, to keep it on track. Also, every time you make contributions, we’ll automatically add the government’s top up to your Wealthify pension and invest it for you. But that’s not all, with our online investing platform, you’re in total control as you can check how your investments are performing at anytime, anywhere.
Consider consolidating your pensions
On average, people will have 12 jobs in their lifetime, meaning they’ll likely have as many pension pots floating around2. If you’ve been contributing to different workplace pensions, it could be a good idea to consolidate all your pensions into one simple scheme. But before transferring your pensions in one place, make sure you shop around and compare the different fees taken by providers. It’s not always well understood, but charges and fees are not necessarily harmless. They’ll ultimately eat into your potential returns and can therefore make a significant difference to how much money you will have during your golden years. So, it’s important to try and keep them to a minimum. However, don’t just focus on fees and look at the rest of the package. Things like customer service and investment strategy are just as important and deserve as much attention.
Combining your previous pensions can sound like a big job, but it doesn’t need to be. With Wealthify, bringing all your pensions together has never been easier. All you need to do is choose how much you want to transfer and the risk level you’re most comfortable with. More importantly, for your transfer to be successful, you must complete the official Pension Transfer Form. If you want to learn more about bringing your pensions to Wealthify, please visit our transfer page: https://www.wealthify.com/pension-transfer.
Decide when and how to use your pension pot
As retirement nears, it’s important to decide when to use your pension pot. As things currently stand, you’ll be able to access your state pension when you turn 65. However, the pension age will increase to 66 by April 2020, 67 by 2029, and 68 between 2037 and 2039. For workplace pensions and SIPPs, you’re allowed to access your funds a bit earlier, at the age of 55.
As you decide when to start using your pension, it’s also a good idea to think about the way you’ll withdraw your funds. Some pensions will pay out a specific income for life which will increase each year – this is often referred to as ‘defined benefit pensions.’ Other schemes, like the Wealthify Pension, will offer more flexibility as they’ll let you choose how to take your money out. These pensions are known as ‘defined contribution schemes’, and you can either take your whole pension as a lump sum in one go, withdraw lump sums when you need them, or get paid a regular income based on your pot size. Whatever option you go for, you’ll be able to take up to 25% of your pot as a tax-free lump sum.
Say goodbye to your working life
Once you’ve reached all your retirement targets, you can officially leave the working world and retire. But don’t forget, you can keep putting money aside to help boost your golden years. If you have a SIPP, you can make contributions until the age of 75. So, you could keep up the effort and enjoy the retirement you’ve always envisioned.
The tax treatment depends on your individual circumstances and may be 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.