We all know how important it is to plan for retirement, but pension planning is complicated. Often, it’s hard to know exactly where to begin.
Yet the sooner you start a pension the better – the earlier you open a pension, the less you’ll need to contribute into your pension pot each month to make sure you’ve got a comfortable retirement ahead.
As life expectancy rises, we’re all likely to spend more time in retirement than our parents and grandparents before us. That means it’s never been more important to sort out your pension.
It sounds obvious, but if you’re close to retirement age it’s almost too late to start pension planning. You need to start planning for your retirement ideally decades in advance.
While it’s never technically too late to contribute to a pension — although you’ll stop getting tax relief on pension contributions once you’re 75 — obviously the earlier you start contributing to a pension, the easier it is to build a decent retirement pot.
Thanks to the power of compound interest, pension savings can really build up over several decades, making contributions made early in your career almost more valuable than ones made later on, even if those later contributions are larger.
If you’ve started saving later and are now close to retirement, then you may discover your retirement income simply won’t be enough. Those who haven’t started a pension early enough will face a series of tough decisions as they get close to retirement.
They can either work longer than they’d planned, sacrifice a substantial chunk of their income to build a pension pot in their final years of work, or retire with a lower pension than they’d ideally need.
Many people are already currently deferring their retirement, potentially staying in work after their retirement age because their savings just won’t provide them with the pension they need.
According to the Office for National Statistics, more than 11% of people aged 65+ were still working in the 3 months to June 2019. If you’d rather not work longer, it’s important you ensure you’ve saved enough during your working life to accommodate your retirement goals.
You can also increase the amount you’re paying into your pension, but if you’re looking to boost your contributions towards the end of your working life, you may come up against a strict annual cap on your contributions known as the annual allowance.
The absolute maximum you can save into a pension each year currently stands at £60,000 a year including HMRC’s tax contributions, although this will depend on your income. This means you may not be able to contribute all you want to a pension in your final years of work to build a decent retirement pot.
To calculate the value of your pension at retirement based on your current contributions, and work out how long it will last, use our Pension Pot Calculator below.
UK life expectancy is on the rise. According to an ONS life expectancy calculator, a 50-year-old man in the UK today has a 1 in 4 chance of reaching the age of 95 and a 1 in 10 chance of reaching 100. His average life expectancy is 86.
A 50-year-old woman has an average life expectancy of 89. She has a 1 in 4 chance of reaching 97 and a 1 in 10 chance of more than doubling her current lifespan and reaching the age of 102.
If you’re born on or before 5 April 1970, you have a State Pension Age of 67. That means a man needs a pension to last 19 years after the state pension age if he lives to his average life expectancy, while a woman needs her person to last 22 years.
However, 25% of men aged 50 today will need their retirement savings to last 28 years if they wait to retire until 67, and the same proportion of women will need theirs to last 30 years.
Many defined contribution pensions let you can access your pension at 55, but at this point you may only be just over halfway through your life.
Think carefully before releasing your pension and deciding how you’re going to take it. Remember, you need to consider the fact that you may have to live on that money for another 50 years.
Jonathan Cooper
Senior Paraplanner at Drewberry
Our handy Pension Drawdown Calculator will work out how long your pension pot will last depending on your income needs in retirement.
Of course, if you want to ensure your pension will never run out and will last as long as you do, you may want to consider an annuity. This provides you with a guaranteed income for the rest of your life.
While it’s important to start saving as early as possible, being over-prepared for retirement can be as bad as being under-prepared.
Many of us build up numerous pensions over the years through previous employers, but having too many pension pots could actually be a barrier to successful retirement planning.
This is because each pension pot incurs management fees and other charges in its own right — it’s usually cheaper to pay fees on fewer, larger pots than on many smaller ones. That means consolidating your pensions can save you cash.
It might also be easier to identify any potential shortfall in savings when you don’t have as many pensions to focus on at once.
A pension review will involve examining the various fees and charges you’re paying and ensuring they’re still competitive. Many older schemes may have higher charges; you may also be paying fees for advice but not receiving a service from them.
If you have an adviser when was the last time you spoke to them? At Drewberry we conduct ongoing reviews every year.
If you have multiple pensions from old jobs, consider using a pension consolidation service to see if it’s worth merging your pensions into fewer arrangements.
A financial adviser will be able to help you make sense of your pension arrangements and point out where things could be rationalised if necessary.
Often, this will allow you to better plan for your retirement and also discover a number of efficiency savings you can make, including on any tax you may have to pay after you start taking your pension.
As well as considering merging pensions from previous employers, it’s definitely worth making the effort to trace lost pensions that you may have forgotten about.
Pension tracing can be done by your adviser as part of a pensions review, but you can actually do most of the work yourself for absolutely nothing. The government’s free online pension tracing service can help you unearth pensions from old jobs you might not even remember you had!
Once you’ve found lost pensions, you’ll have a better idea of how prepared you are for retirement. You might also be able to merge them with other pensions to reduce charges and better manage your investment risk.
Do you know the risk profile of your pension investments?
It’s important your pension investments align with your appetite for investment risk.
You may be pleasantly surprised with the investment performance of your fund today, but are you taking a higher degree of risk than you thought? A high risk fund may perform well in the good times, but could leave you exposed in the bad.
Any older pension funds might also not be aligned to your current investment needs. As you get closer to retirement, for example, the general wisdom is that you should move your pension into safer investments than when you were younger to help protect against any sudden shocks given your limited time to make good any losses.
In contrast, when you’re younger and have decades ahead of you to build your fund, a higher risk profile might make more sense as you have the time to regain any investment losses.
Thanks to auto-enrolment, it’s become mandatory for almost every company to offer pensions to their employees.
Most employers already offer workplace pensions to their employees, usually in the form of defined contribution plans.
Some larger employers may still offer more generous final salary schemes, although these are increasingly closed to new members.
It’s definitely worth considering joining your employer’s pension scheme regardless of the type of pension they offer, as most employers offer pension contributions on your behalf. They can write the cost off as a business expense, and their contributions will help your pension pot grow faster.
In most cases no, contractors aren’t entitled to pensions from their employers. Pensions for the self-employed are entirely arranged by the individual, which is also the case for most pensions for contractors. That means it’s vitally important you make pension arrangements for yourself.
However, if you’re a contractor requiring a pension, you may be able to get some external involvement in your retirement planning if you work through an umbrella company.
This involves salary sacrifice, where the umbrella company essentially takes a chunk of your salary and pay it into a pension pot for you instead. This offers National Insurance savings for both parties and tax relief for you.
Pension tax relief means your pension will probably be the most tax-efficient savings vehicle you’ll ever use.
When you contribute to a pension, you automatically receive basic rate (20%) tax relief at the source. So for every £80 you put into your pension, HMRC tops it up to £100.
Higher rate (40%) and additional rate (45%) taxpayers can get pension tax relief at their highest marginal rate, but you have to reclaim this themselves from HMRC using a self-assessment tax form.
Don’t miss out on valuable additional pension tax relief — make sure you claim everything you’re entitled to.
Higher rate taxpayers only need to put £60 into their pension pots to achieve a total saving of £100 thanks to pension tax relief, while an additional rate taxpayer has to put in just £55 for the same £100.
Many people forget about the state pension when planning for their retirement, but if you’re eligible for the state pension it makes up an important cornerstone of retirement planning.
You can request a state pension statement from the government to check whether you’ll get the full state pension.
If you won’t get the full state pension because you haven’t made enough National Insurance contributions, you have the chance to rectify this by making additional voluntary National Insurance contributions before you retire.
Voluntary National Insurance contributions can ensure you have enough qualifying years to receive the full state pension.
You can also defer your state pension, which means you delay claiming it until after your retirement age. For anyone due to retire on or after April 6, 2016, you’ll receive higher weekly payments if you defer. For every 9 weeks you delay taking your state pension, the payments will increase by 1%, equivalent to 5.8% for every full year.
Pension fraud is sadly a very real issue. The big pots of money many of us build up in pensions make them tempting targets for thieves and fraudsters.
The introduction of the new pension freedoms has compounded the issue. Although many people now have more control over their retirement than ever before, criminals have taken advantage of the public’s awareness of the reforms to commit pension fraud.
One of the most common types of pension fraud is pension liberation scams. These offer false promises to release your pension early, before the age of 55.
For almost every pension scheme around, it’s never possible to release your pension early unless you’ve been diagnosed as severely ill and have a compromised lifespan.
Another common scam has seen people targeted with the offer of new pension investment opportunities that may not even exist.
If they do exist, many aren’t recognised as pension schemes by HMRC and putting cash into them could land you with a nasty unexpected tax bill for what you thought was a safe retirement nest egg. This is especially true if you’ve transferred from a legitimate pension scheme.
A good financial plan can help you make the right decisions when it comes to your finances. Make the right decisions today to build a more prosperous future.
Good financial planning with clear goals can increase your retirement income by as much as 53%. Old Mutual Redefining Retirement Survey
We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as planning our finances. Below are just a few reasons why it makes sense to let us help.