Are you saving enough to achieve your desired standard of living in retirement? If you’re not sure, then it’s time for you to take a look at the shape of your pension savings and start planning for the retirement you want. As financial planners, we understand the importance of living now while saving for retirement. However, in the UK, we’re facing a potential pension crisis, whereby millions of people are not saving enough for their retirement. And with the State Pension age rising, there is a real need for people to start planning for retirement earlier on.
In support of Pension Awareness Week, this blog will cover why you should plan your retirement income now, how to boost your pension savings, as well as the benefits of saving more in the lead-up to retirement.
The importance of living now while saving for the future
Following the Pension Freedoms introduced in 2015, you can now access your defined contribution pension from the age of 55 in a more flexible way (increasing to 57 by 2028). While this does present greater freedom and flexibility which is great, it’s also worth understanding the risks.
With life expectancy increasing, people approaching retirement are likely to have a third of their life still ahead of them. As a result, your pension fund needs to support you for a significant amount of time.
Which makes it no surprise that new research by the Banking group, Close Brothers, revealed that funding retirement is the biggest money worry for UK employees.
The key to a good financial plan is working out how much you need to live the life you want, both now and in the future. It’s only then that you begin to understand and improve your financial wellbeing. And it’s the same with retirement planning, the earlier you calculate how much income you need to achieve all that you want in this stage of life, the longer you have to make alterations that will boost your pension savings. Or, if you are lucky enough to find out that you already have enough, you can continue to enjoy life now, assured that your financial future is secure.
Ultimately, financial planning gives you the freedom to enjoy life, knowing you can afford to.
What are the benefits of saving more in your pension pots?
Pensions have always had a bit of a bad rap; they are complicated, and the idea of locking their money away for a long time can be offputting. That being said, they have a lot of benefits too:
Your pension is a tax-free wrapper to save for retirement. Whatever you put in, not only attracts tax relief, but it also sits there in a tax-free environment.
Each year you can save up to your annual allowance (AA) – capped at £40,000 for 2020/21. However, a lower limit might apply if you have accessed taxable pension income from a Money Purchase pension (Money Purchase Annual Allowance), or if you are a high earner earning over £200,00 of ‘Threshold Income’ and £240,000 of ‘Adjusted Income (Tapered Annual Allowance).
All UK employers must automatically put their employees into a pension scheme, provided they meet the qualifying criteria. Employers must then contribute 5% of your qualifying earnings into your pension, whilst you pay 3%.
However, recent reports show that one in ten workers paused their pension contributions at the beginning of lockdown. Opt-outs last three years, unless you opt yourself back in, which would have a significant impact on your retirement pot. So when you can, make sure you sign up again and that you don’t lose out on valuable employer contributions.
It’s also worth checking whether your employer will match your contributions. The legal minimum requirement is 5% employer contributions and 3% employee. But if you can afford to pay more, then it is always worth seeing if your employer will also agree to an increase.
A comfortable retirement
Do you know how much you will need to live comfortably in retirement? You probably have a figure in mind. But is it realistic, will it meet your needs, or be achievable?
The UK Retirement Living Standards sets out three standards of living in retirement: minimum, moderate and comfortable, as well as what you need to save to achieve each.
You can also use the Money Advice Service pension calculator here to give you an idea of how much your retirement income is likely to be based on your current level of savings.
It’s also worthwhile seeking pension advice from a financial planner, sooner rather than later. In some cases, it can bring your retirement date closer or highlight any shortfalls you might face. So it’s worth having a conversation about your finances with a professional for you to understand the full extent of your financial position and your future possibilities.
Making your money work harder for longer
If you save into your pension from an earlier age, and the investments do well over time, then the value of your pension can increase significantly without you having to do anything more. Win-win!
How to boost your pension in the lead-up to retirement
There are a few ways you can give your pension savings a boost that will see your money go further when you come to really need it.
Increase workplace and personal pension contributions
Typically, you will automatically benefit from 20% tax relief at source on any contributions you make. And, if you’re a higher rate taxpayer, then you can claim an extra 20% tax relief (on the amount you paid higher rate tax on) through your Self-Assessment tax return. So the more you pay in, the more tax relief you could benefit from (subject to limits).
Making the most of your state pension
You’ll need at least 35 qualifying years of National Insurance contributions to get the full State Pension of £175.20 per week in 2020/21. If you’re not sure whether you are on track to reach your 35 years, then you can request a State Pension forecast here. If you have any gaps in your record, you can also look at what you need to top these up.
Deferring your retirement
If you decide that you can carry on working for a little bit longer and you still love what you do. You can defer your retirement plans and continue saving. You can also look at deferring your State Pension, which will increase by 1% for every nine weeks you defer. That works out as an extra 5.8% for every full year deferred.
Look for lost pensions
There are 1.6 million ‘lost’ pensions in the UK, worth more than £19.4bn according to the Association of British Insurers. You can use the Government’s free lost pension service to find any of your missing pots.
Retirement forms a significant part of your life, so you need to make sure you plan for it in the right way, and you don’t leave it too late.