Getting your pension in shape to enjoy the kind of lifestyle you want in later life
‘Will I be able to afford the retirement lifestyle I want?’ is a question that many people ask but struggle to figure out. There are many ways to assess your likely income in retirement and work out how much you need to put away now to enjoy the kind of lifestyle you want in later life.
We know that we want an active, comfortable retirement but often don’t know where to start the savings and investment process. The starting point is to obtain professional financial advice and set a plan in motion that is reviewed at least annually to enable you to build the future retirement you want.
Key considerations for most people
Everybody’s circumstances are different, but the key considerations for most people when they think about retiring will come down to factors such as whether they’re renting, paying a mortgage, have any debt, plan to keep working, and how much money they have saved in pensions and other investments. People estimate that living reasonably comfortably in retirement requires around 50% to 60%* of the income they had while they were working.
Your life changes when you retire – and so does the way you spend your money. The increases in the cost of living with inflation are another important consideration. While the State Pension increases with inflation (with the ‘triple lock’, increases can exceed inflation), income from your pension might not, depending on how you decide to take your money.
Start saving for your pension early
If you start saving for your pension early in your working life, it may be difficult to predict what your needs will be when you retire. Ideally, you should aim to put away as much as you can afford, but don’t worry if it’s not as much as you’d like to start with. It can be better to save small amounts that have a long time to grow in value. As your income improves, you may be able to increase how much you put away for your pension.
If you’ve started to save later in your working life, you may have a better idea of what your circumstances are likely to be, which can make it easier to work out what level of income you’ll need for your retirement. However, you’ll have less time to save it up and the amount of money you’ll need to save may be higher.
Achieving financial freedom
Saving for retirement is essential if you want the financial freedom to enjoy your later years. Things to consider include:
- Deciding how much money you want each year in retirement
- Calculating how big your pension pot needs to be to give you that income
- Working out how much you should be saving today in order to build that kind of pension pot value
Government research indicates that people earning around £50,000 or more per year look to achieve a retirement income that is 50% of their current salary. If that doesn’t sound like much, remember you’re perhaps unlikely to have a mortgage and other big expenses at this stage in your life so you may need a lot less than you do when you’re working. The ratio tends to go up for those on lower salaries, as you’d expect.
Know your number
Next, you want to work out how big your pension pot needs to be in order to achieve the retirement income you want. One rule of thumb is to take the annual retirement income you’d like – let’s say it’s around £50,000 based on the above – and then multiply that by 20. So in this example, to achieve a retirement income of £50,000, you’d need to build up a pension pot worth in the region of £1,000,000.
|Your annual allowance
You can receive tax relief on pension contributions worth up to the lower of 100% of your annual salary or the annual allowance. The standard annual allowance is currently set at £40,000 for the current 2016/2017 tax year (higher earners or those who have flexibly accessed their pensions may have a lower figure). If the contributions to all your pensions (including all personal and workplace contributions) are more than the annual allowance, you may have to pay a tax charge on anything over the annual allowance based on the highest rate of Income Tax.
Need to boost your future retirement income?
Everyone’s retirement needs are different, and planning for your retirement is just like any other kind of budgeting you have to do: it requires calculating some numbers, implementing a plan and continually reviewing it until you reach your goal.
*Scottish Widows, October 2014
A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.
YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.