When it comes to retirement planning, many people are frightened of the ‘P’ word! Yet, a pension is as flexible and as personal as you want to make it. It’s basically just a pot of money that you – and potentially, your employer – can pay into over your working life and that you will get tax relief on. This means it’s likely to grow faster and bigger than an alternative form of savings. ISAs are another excellent way of saving for the future. They are more flexible than pensions but do not receive any tax relief on contributions
It is never too early to start planning for your retirement. It sounds like a boring thing to be thinking about in your twenties and too far off to seem real, but consider:
If you want to retire on say £30,000 a year, then you will need a retirement fund of more than £600,000. That kind of pot is going to require some planning and a lot of saving, so don’t waste any time. After all, the earlier you start to save, the less you will need to save yourself, as growth will be a bigger factor on the size of the fund that you will achieve. Checklist spoke to Nico Goymer of The Wealth Group (Financial Advice and Wealth Management) in Evesham for some pointers on retirement planning at different stages in our life.
In your 20s
When it comes to retirement planning, it really is a case of the earlier the better. Consider setting up a Lifetime ISA (or LISA). A LISA is a tax-free account for saving towards your first home or your retirement, with the government adding a 25% bonus to anything you save.
You can save up to £4,000 a year, either as a lump sum, by regular contributions, or just topping up funds when you can. The state will add a 25% bonus on top. So if you invest £1,000, the state will make it up to £1,250 and if you save the full £4,000 annual allowance, you’ll be saving £5,000 a year. Then there’s interest on top of that and because it’s an ISA, it’s tax free.
If you have parents or grandparents with deep pockets, think about asking for ISA contributions for birthday presents. Every bit helps. It’s more bricks in the wall and remember, the state will add an extra 25% on top of anything you’re given.
In your 30s
Always join the company pension scheme. Younger investors often think retirement is just too far away to be worrying about, but the implementation of Auto-enrolment means many more people now have pension schemes. While the scheme will be a good start and it’s great that a culture of retirement planning is being encouraged in principle, in reality, your scheme on its own is unlikely to be sufficient for your future needs.
Our 30s is often the time that other priorities are calling on our income. Mortgages and the costs of young families often demand most of what the taxman hasn’t already claimed. But try to top up your pension with regular payments if possible – even if it’s only a very small amount. Research different pension schemes to find one that’s flexible enough for your needs and bear in mind that it’s usually the most tax-efficient way of saving for the future. Remember, funds invested when you are younger have more time to grow.
In your 40s
This is likely to be a time when our earning capacity is growing and consolidating. Perhaps a little more is available after the household budget has done its worst. Try to establish whether you might have spare income to supplement your retirement savings. If you’re not certain it really is spare, perhaps put it into a savings account that can be accessed if needed. Then, at the end of the tax year on 5 April each year, if the savings really are available, at this point invest into your pension or an ISA.
It helps to build and develop a retirement plan if you haven’t done so already. Set yourself clear objectives. Ask yourself:
- What age do I want to retire?
- How much income will I need in retirement?
Working backwards, consider how these questions will be answered and what funding is potentially required. Consider:
Typical rates of withdrawal are 4-5% p.a. from a pension fund. What guaranteed income will you receive in terms of both state pension and company final salary pension? What assets might you have in terms of investment, inheritances or properties?
If there is a shortfall, do you plan to address this through: Pensions? ISAs? Bonds? Other investments?
In your 50s
This is a time to consolidate the efforts you have made to date. Typically, demands on your monthly income are starting to ease, with children becoming (for the lucky ones anyway!) more financially independent.
Continue to invest as much as you can afford in your pension fund and while most private pensions can be accessed from the age of 55, consider delaying drawing on it if you don’t need the funds and continue to save a little longer. Typically, older savers are likely to focus deposits on their pension fund rather than ISAs or other investments as the tax efficiency is more attractive than the prospect of growth alone over a shorter period of time.
In your 60s
Congratulations! You’ve rounded the corner to the Big Six-O and won yourself free prescriptions and free eye tests! And if you live in Scotland, Wales or Northern Ireland, a free bus pass too! (If you’re in England, you’ll have to wait another six years until you’re 66.)
Copies of Saga magazine suddenly start dropping onto your doormat and you’ll find you’re eligible for discounts to all sort of attractions and activities – many of which you didn’t even know you were interested in!
Today, you’re eligible for state pension when you reach 66, but it is set to rise to 67 by 2029 and to 68 by 2039. Current maximum state pension is £179.60 a week (HMRC July 2021), but with an ageing population and a financial future that’s more uncertain than it’s ever been, who knows what the value of it will be in 10, 20 or even 40 years’ time. One thing’s for sure, if you start planning early, you’ll be thanking 20-year-old you for looking out for your future self all those years ago.
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