Saving for your retirement can be tricky when you don’t know what your circumstances will be later in life.
It’s a complicated subject and understanding how much you’ll need and the best way to get there will ultimately come down to your personal goals and the advice of your financial planners.
However, it helps to get a sense of some of the things to consider when looking ahead.
We often think carefully about getting to retirement, but not so much about how we’ll manage our savings once we have finally retired.
In this article, we’re going to look at what some of these considerations are and at some of the widely available products out there that are designed to address them. Please note that this article is intended to give some helpful information, nothing in it should be considered advice or a recommendation.
1) How much income will I need after retirement?
Receiving the same income you enjoyed during your career is a very attractive idea. It’s one a lot of people aspire to.
But the truth is that many of us tend to overestimate the amount we need to live on comfortably after retirement.
This is because we assume we’ll continue spending the equivalent of our wages.
In reality, you’ll probably only spend between half and two-thirds of the final salary you had while you were working.
A recent survey by Money.co.uk interviewed 6,800 retirees and found that the average retired couple spent just under £2,170 a month. That’s £26,000 a year.
This covered all the basics and even some luxuries like European holidays and occasional dining out.
However, that figure jumped considerably to £41,000 a year when a couple of long-haul trips and a budget for a new car every 5 years were included.
Ultimately, it all comes down to your chosen lifestyle. A reasonably effective rule of thumb is to stick to the ‘70 Per Cent Principal’ i.e. aim to have a total pension income of around 70% of your working income at retirement to maintain something like the lifestyle you were accustomed to before you gave up work.
2) How should I build my retirement pot?
Needless to say, this is a serious question that you should be putting to your financial adviser. It isn’t one we are able to offer professional guidance or advice on.
There are many different ways people choose to go about this.
Once you’ve set for yourself an income target, most people choose to build their pension income on three blocks.
First, many people will have workplace or private pension savings; secondly they will expect to receive some money from their state pension; and, finally, they will aim for some other extra income from additional savings and investments.
Pension savings options
Pensions are the most common source of retirement income amongst Brits.
Since 2012, if you are employed in the UK you will usually be automatically enrolled into a workplace pension, if you haven’t already joined your company scheme. You have to actively opt out if you don’t wish to save through the company’s scheme. At present, you are allowed to access the savings you’ve built up once you reach the age of 55. However, the ‘pension freedom age’ is going to rise to 57 in 2028, with further increases expected to take place in the future.
There are two main types of workplace pensions, defined contribution (DC) and defined benefit (DB).
A DC pension is a pot of savings you build up over time made up of contributions from yourself and your employer. DC pension savings are usually managed by professional companies and invested in assets such as stocks and shares and bonds, and (hopefully!) they grow over time. The pot is used to fund your retirement.
Some employers provide DB pensions which offer a set annual pension, usually a percentage of your final salary, to be paid to you after you retire for the rest of your life. This amount will usually increase over time to keep up with inflation and may even continue to provide an income for your partner after you die.
Using a DC pension – annuities and drawdowns
If you have a DC pension pot, when you approach retirement you’ll need to decide how you use your pension savings. With small pension pots you may be able to take all of your money out in one go without paying tax on it. However, in most cases you will be able to take up to 25% of your pension savings tax free and then choose between buying an annuity, using your pot to drawdown income or a combination of the two.
An annuity is a financial product that pays a guaranteed income for life. There are different types of annuities available, some pay a fixed income and others increase over time which can help with things like inflation. Those which increase over time usually pay a smaller amount initially than an annuity that pays a fixed amount each year. Generally speaking, the older you are, the higher income you can ‘buy’ with an annuity. The same also applies if you have poor health.
Retirees can also choose to ‘drawdown’ the rest of their pension savings over time. They leave the money invested and choose to withdraw an amount each year based on how long they would like the pot to last.
There are advantages and disadvantages to both annuities and drawdown depending on your personal circumstances, so it’s always best to take independent financial advice before making this very important decision.
If you have built up entitlement to the state pension through your working lifetime, usually through National Insurance contributions, you should receive the State Pension when you reach the Government’s State Pension age. Currently it’s 66 but this is expected to rise to 67 between 2026 and 2028 and to 68 between 2037 and 2039.
At present, the maximum state pension is £179.60 per week. Couples receive a state pension each with the actual amount each person gets depending on your National Insurance contributions.
You can check your state pension forecast here: https://www.gov.uk/check-state-pension
3) Boosting retirement income
Having worked so hard and saved for your retirement, you deserve to be able to sit back and enjoy yourself a little.
So, it makes sense to plan how you’ll make your retirement savings last. The more planning you do now, the more you can relax and make the most of all that free time!
Unfortunately, many people in the UK fail to take advantage of all the savings and investment opportunities out there. It is all too common to hear of retirees with large cash sums sitting in current or instant access savings accounts earning very little or no interest.
Often this is due to a lack of time, experience or a sense that they should keep all of their savings available all of the time. However, there are many effective and easy to arrange savings and investment options out there for savvy-retirees.
For example, Cash ISAs with fixed terms may earn you a better rate of interest tax free without risking your capital and are suitable for people who are happy to put some of their savings away for a year or more. There’s nothing to stop you keeping a smaller amount on hand in a different account for emergencies.
Again, it is a good idea to get professional financial advice from someone who can help you consider your options and attitude to risk. You can also use free trusted resources such as the website www.moneyhelper.org.uk which is an impartial source of personal financial information backed by the Government.
There are lots of different types of ISAs out there. For a detailed guide, have a look at our recent article 7 Facts About ISAs You Should Know in 2022
Although this email and article may contain helpful information and tips, these are not personal advice. You may wish to seek advice from a financial advisor if you are unsure what’s best for your own personal circumstances.