Published on: 23rd December 2019
When you picture retirement, what are you doing? Retirement goals can vary hugely. Some will have grand plans to travel the world, whilst others will be looking forward to relaxing with loved ones. Whatever your aspirations, you should review your pension to ensure your retirement dream is on track.
Research suggests that some pension savers in the UK could be heading towards a disappointing retirement.
Whilst auto-enrolment means millions of workers are saving into a pension for the first time, many are still making only the minimum contribution levels. In fact, 70% don’t make additional contributions. Minimum contribution levels are currently set at 5% of pensionable earnings for the employee and 3% for employers. But this rate of saving could leave a significant gap.
According to the Institute of Faculty of Actuaries, individuals aiming for a ‘minimum’ income of £10,200 would need to contribute around £86 to their pension each month throughout the course of their working life. This contribution can be made up of employee and employer contributions, as well as tax relief.
However, the savings needed to reach a ‘moderate’ income rises steeply. The organisation estimated individuals would need to see their pension increase by £799 per month to achieve an income of £20,200. For a comfortable income of £33,000, the monthly costs more than double again to £1,755.
Mark Williams, Chair of the Institute of Faculty of Actuaries Pensions Board, said: “Modern workplace pensions require people to take responsibility for their own retirement saving and planning, but clear and consistent information on how much they need to save can be difficult to find. In our survey, almost a third of respondents said they did not know what constitutes a ‘good pension pot’.”
Are you on the right track for retirement?
The sums laid out by the research can seem daunting. And you may be worried that you’re not on the right track to reaching retirement goals. However, it’s important to recognise that goals are different and pensions aren’t your only source of income at retirement.
The first thing to do when reviewing your pension savings is to understand how much you need for the retirement you’re dreaming of. Many people find their annual expenditure actually decreases once they retire and they don’t have work commitments. You may also find yourself in a better position due to paying off debt, including your mortgage, before giving up work. Of course, spending on hobbies and travel, for example, may rise as you have more free time on your hands.
Setting out clearly how much you want to receive in income each year is the first step to creating a target pension figure. In addition to regular outgoings, you should include any large one-off expenses you expect to make in retirement too.
You then need to calculate how many years your pension will need to pay out for. This is linked to two factors: your planned retirement date and life expectancy.
Life expectancy plays an important role in ensuring your pension will support you for the rest of your life. It’s worth noting that it’s common for those approaching retirement age to underestimate how long they’ll live for, potentially leading to them spending too much money too soon. You also need to consider that a portion of people outlives the average life expectancy. If you were to live for a further five years, would you have enough? It’s not uncommon for people to live into their nineties and this should be a consideration when calculating how long your pension needs to last for.
With your expected retirement expenditure and life expectancy, you can calculate how much you need to have in your pension at the point of retirement to achieve dreams.
How retirement planning can help
When you glance at the figure you hope to have in your pension, it can be daunting. But it’s important to realise this will grow, particularly if you still have many years of work left.
It’s not just your contributions that will help you reach this goal. Employer contributions, tax relief and investment returns will also play a role. However, calculating how these will add up over the next ten or 20 years can be complex. This is where retirement planning can help. We can use tools to help you visualise how your pension wealth will change over time depending on the decision you make up to retirement. Once you factor in growth, your goal can seem far more achievable.
Whilst workplace pensions are the main source of income for many retirees, you may plan to use other assets. This could range from the State Pension through to Buy to Let property. We’ll help you pull together these different strands of potential retirement income to understand if you’re on the right track.
Retirement planning can give you peace of mind and identify where potential gaps could put your retirement dreams at risk, giving you the information needed to act. Please contact us to speak to an experienced financial planner about your retirement aspirations and how to achieve them.
Please note: 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 the 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.