Knowing how much you’ll need to save for a comfortable retirement is a question we get asked regularly, and the answer is dependent largely on your cost of living and lifestyle choices.
Retirement is not what it used to be, with more of us working longer to build up our desired retirement income. Reassessing how much you’re saving into your pension is therefore essential if you want to make your vision a reality.
For many people, retirement may seem a long way off, and saving into a pension isn’t always a top priority. But the simple truth is the earlier you start with your retirement plan, the easier it will be. If you have less time to invest, then the amount of money that you have to save is likely to be higher to make sure you are on track.
Below are a few ideas to help improve and boost your savings for a more comfortable retirement.
Where to start with your retirement plan
Working out what pensions you already have is a sensible starting point for your retirement plan. Locate the latest statements for all your pensions, including from previous employers and personal pensions. You can also get a forecast of your state pension via www.gov.uk/check-state-pension.
You should be sent an annual statement for each of your pension schemes even if you are no longer contributing to them. If you don’t have up-to-date statements, you can ask for these to be sent to you. You may also be able to access pension values online via your pension company/scheme website.
Valuing your pension
As well as telling you what your pension is worth now, annual statements will also detail what your pension might be worth at retirement. These forecasts (don’t think of them as anything more than rough estimates) will be based on a range of assumptions including investment growth and inflation between now and retirement. It is important to consider the effect of inflation because, over time, this can significantly reduce the spending power of your pension.
Lifestyle costs
Whether your pension will be enough to pay for the retirement you want will depend on the savings pot you amass, as well as the cost of your lifestyle when you retire. Working out what income you will need in retirement can be tricky as your life in retirement will be different from your working life; some costs may go up, while others will reduce. For example, you may spend more on holidays and leisure, but your housing costs may be lower. While you may no longer have the costs of bringing up children, you may still want to help them financially, and in your later retirement years, you could have care costs to consider.
The traditional rule of thumb has been a target pension income of two thirds of your salary.
Know your magic number
Having accounted for the State Pension and any private pensions, you need to calculate how much money you will need to save to produce the remainder of your target income.
This can depend on factors such as the age you want to retire, income yields available on investments, price rises during your retirement, how long you live for and how much you have put aside already.
If you contribute through a workplace pension, your employer will also contribute on your behalf, and you could qualify for National Insurance savings through a ‘salary sacrifice’ arrangement. Employer top-ups in particular can significantly increase the value of your pension contributions, so it is worth checking that you are making the most of any workplace generosity offered.
It’s also important to be aware that there is a limit on the size of overall pension savings you can accumulate – currently £1.073 million (for 2023/24) – without facing a hefty tax charge.
Alternative wealth opportunities
Pensions are not the only way to save for retirement. Tax-efficient Individual Savings Accounts (ISAs) are a popular savings option, while many people see property – particularly in the form of buy-to-let – as their retirement nest egg.
Timing retirement
Retirees have considerable flexibility over how they access their retirement savings. Pension savings can currently be accessed from age 55 (this will increase to 57 from 2028) and you can choose how much income you take and when to take it. You could take your whole pension fund as cash in one go – with 25% being tax-free and the rest taxable. Or you could take a lump sum now, with further withdrawals when you want. Or you could buy an annuity for an ongoing regular income. The danger of flexibility, however, is that people withdraw too much money too quickly and risk running out before they die.
It is also possible to pass on your pension savings completely free of tax. So, as well as being a tax-efficient way to invest, pensions can be a very useful way to reduce Inheritance Tax bills.
Seize the day – start your retirement plan today
Too many people fail to seriously consider how they are going to manage financially in retirement until they are about to retire. It is only then that they discover that their pension is not on target to meet their retirement aspirations.
When you are living a busy life, it can be difficult to find time to consider your long-term retirement plan. Your mortgage, children or career might be more of an immediate priority. However, getting your pension on track as soon as possible could save you and your family a financial headache later on.
Contact us for a financial planning review
Speak to one of our friendly advisers to review where you are financially. Call 0115 947 5545. or contact us here for a free consultation.