How to plan for retirement in your 40s, 50s, 60s and 70s
Saving enough during your working life will not just give you freedom to manage your finances more flexibly, it will also help you secure a more comfortable lifestyle in retirement.
￼￼The size of the fund you’ll need will invariably be daunting: if you plan to retire at 65, you will need a pot worth £400,000 to provide you with an annual income of £20,000.
Hitting this number might seem impossible, especially if retirement isn’t that far off, but don’t worry; there is plenty you can do to improve your position and achieve your goals. Here’s how to take control of your retirement planning at different stages of your life.
- Make sure you read our Retirement timeline for a handy checklist of what to do before the big day.
Save spare cash in your 40s
Once you reach your 40s, your finances should be on a fairly even keel. Your earning power is likely to have increased significantly, and your mortgage should be under control. Costs such as childcare will soon be behind you, if they aren’t already, and you should have spare cash to direct into your retirement plan. Danny Cox, chartered financial planner at Hargreaves Lansdown, says this is the ideal time to start increasing the amount you save for retirement.
“Make sure you’re in your occupational pension scheme and taking full advantage of any
contribution matching your employer offers,” he says. “If you don’t, you’re giving money away.”
Under the auto-enrolment rules, your employer will be putting the equivalent of a minimum of 1% of your earnings into your pension – this figure will rise to 3% by 2019. Generous employers will pay more, but this is sometimes dependent on you making an equivalent contribution yourself.
If you do want to max out your contributions, you’ll need to be aware of the annual allowance. Under the rules, the most you can pay in over the course of a year to receive tax relief is either the equivalent of your annual earnings or £40,000, whichever is lower.
Building funds for retirement doesn’t have to be just about pensions. “Use your Isa allowance to save up to a further £15,240 a year (in 2016/17) tax-efficiently,” says Jamie Jenkins, head of pension strategy at Standard Life. “Unlike with pensions, there is no tax relief on contributions, but you can withdraw money tax-free whenever you like.”
Wherever you stash the money, it’s sensible to consider your investment strategy. “You want to think about maximising the return,” says Alistair McQueen, savings and retirement manager at Aviva. “You could have as much as 30 or 40 years until you need to draw your pension, so you can afford to take more risk. Over this length of time, you can ride out the ups and downs of the stock market.”
Investment choices: Adrian Lowcock, head of investing at Axa Wealth, recommends Schroder Asian Income. “Asia is out of favour at the moment, but with valuations already attractive compared with developed markets, there are some excellent long-term opportunities there,” he says.
Focus on planning in your 50s
Thoughts of retirement start to become much more concrete in your 50s, whether you’re planning to stop working or not. Indeed, from the age of 55 you can start accessing your pension savings, whether you’ve retired or continue to work.
The heady combination of a small mortgage, more financially independent kids and your highest earning potential means you should have more disposable income than ever.
It’s a good time to take proper control of your plans. “Most people will have built up a series of pensions by the time they reach their 50s, but it’s well worth consolidating these where possible,” says Charlie Reading, chartered financial planner and managing director at Efficient Portfolio. “As well as finding it easier to manage and monitor, you may benefit from lower costs.”
It may even be worth sweeping up old final salary schemes. However, as these schemes provide guaranteed income for life, if the value of your plan is more than £30,000, you will need to get advice first.
Nonetheless, Mr Reading says that, with pension trustees keen to get rid of future liabilities, transfer values can be attractive.
Keep an eye on how much you need to save. As a rule of thumb, Mr Jenkins suggests multiplying the income you want by your life expectancy when you retire. “If you want an annual income of £25,000 from age 65, at which point the average life expectancy is about 20 years, you’ll need to save around £500,000,” he explains.
Again though, these savings don’t have to be made into pensions. Isas give additional flexibility in retirement, because the income they pay is tax-free, unlike pensions, which enjoy upfront tax relief.
You might also want to consider your partner’s pension saving. Even if they’re not working, you can tuck away up to £2,880 a year into a pension for them. The government will top this up to as much as £3,600, thanks to the tax relief.
With retirement within sight, it could be time to adjust your investment strategy, although this will depend on how you intend to access your pension. Mr McQueen explains: “If you’re considering buying an annuity with your pension in the next 10 years, you should look to reduce the risk in the portfolio. By moving into lower-risk assets such as cash and fixed interest, you will shelter your pension from any upsets on the stock market.”
De-risking your portfolio in this way isn’t quite so important, however, if you plan to keep your pension invested.
Investment choices: Whether you’re planning to stay put for the long-term or take an annuity in the next 10 years, Mr Lowcock recommends the Fidelity Global Dividend fund. “It’s a good core fund whatever you decide to do,” he says.
Review your plans in your 60s
Although it’s now possible to work well into your 70s and beyond, by the time you reach your 60s retirement will finally seem a possibility. As well as thinking about how you’d like to spend the money you’ve saved, you should take time to ensure your retirement plans are in order.
First, take a look at the figures. “Get a state pension forecast from the government,” says Mr McQueen. “This will tell you what you’ll receive and when. Also ask your pension providers for statements, so that you can work out what else you’ll receive.”
Armed with these figures, plus details of any other income you can expect in retirement – for example, work, buy-to-let rent or Isas – you can draw up a retirement budget. Mr Reading recommends using lifetime cash flow forecasting to model this. “This will look at what your future income and expenditure will be and help you determine whether your plans are achievable,” he explains. “The basic tools for this are available online, but it can be worth seeing an IFA to get a more detailed appraisal.”
You can still pump money into your pension if your savings don’t yet match your plans, perhaps using the carry-forward rules to mop up previous years’ allowances. Mr Cox explains: “You can use up any unused allowance from the previous three years in addition to the current year’s allowance. You’ll need to earn at least as much as you contribute, but it can be a good way to invest a windfall such as a large bonus or an inheritance.”
You’ll need to have had a pension in the years you’re carrying forward, but in the 2016/17 tax year, it could give you access to as much as an additional £130,000 of contributions (£50,000 annual allowance in 2013/14, followed by £40,000 in each of 2014/15 and 2015/16) on top of the £40,000 for that year.
Two key decisions you will need to make will be how and when you plan to take your pension, as these decisions will affect your investment choices. Mr Jenkins says that if an annuity is on the cards in the next five to 10 years, you could consider one of the off-the-shelf de-risking solutions offered by pension companies.
“These automatically shift your money into lower- risk assets. Some will take five years, others as long as 15 years and, if you change your mind, it’s easy to reset them,” he explains.
Investment choices: For anyone looking to stay invested, Mr Lowcock recommends the Architas Diversified Real Assets fund, which invests in infrastructure projects, airplane leasing and catastrophe financing.
“It’s an excellent diversifier to existing equity income and bond funds, and should provide some protection from volatile markets,” he explains. “If you’re going for an annuity, I’d recommend the M&G Corporate Bond fund, as it provides a solid core bond portfolio.”
Re-examine your priorities in your 70s
It’s likely that by the time you reach your 70s, your focus will be more on leisure than work. As well as funding your retirement lifestyle, you’ll probably also have an eye on inheritance tax (IHT) planning and long-term care needs.
If you’ve got the cash and you’re 75 or under, there’s nothing to stop you paying into your pension to take advantage of the tax relief. Even without an income you’ll be able to pay in up to £2,880 a year, which tax relief will top up to £3,600.
While you may still be paying into your pension, most people will focus on taking an income from retirement savings. If you have a variety of sources to take income from, tax will be a key factor in determining what you take and when. You could take an income from your pension, either as an annuity or drawdown that falls within your personal income tax allowance, topping this up with tax-free withdrawals from your Isa portfolio.
IHT might also influence your income decisions. The new rules allow you to leave your pension IHT-free to anyone you like. If you can live off other income, it may be worth leaving your pension.
Another strategy is to divide your expenditure into essentials, such as bills, and luxuries, such as holidays and meals out. Mr Jenkins explains: “You could take out an annuity to guarantee essentials are taken care of and then use your remaining retirement savings to fund luxuries as and when you want them.”
If an annuity is part of your plan, as well as shopping around to get the best possible rate, Mr Reading recommends factoring your health and lifestyle into the purchase. “We spend most of our life avoiding mentioning our health problems, but telling an annuity provider about health conditions you may have can bump up your income significantly,” he says.
Your home could be used to supplement your income.
Downsizing is the most efficient way to do this, but if you can’t face the upheaval, equity release may be worth considering. “You can use the equity in your property to supplement your income, or pay for home improvements or care,” says Bernie Hickman, managing director of individual retirement at Legal & General. “Products are flexible, so you can set up a drawdown facility and only pay interest on the amount you take.”
Plans allow you to make provision for an inheritance. For example, you could earmark a percentage of the property value that will remain in your estate and only set up drawdown on the remainder. Whatever the sums involved, you have the reassurance of a no-negative-equity guarantee, so you won’t inadvertently leave your kids a debt.
Investment choices: When it comes to investments, Mr Lowcock recommends Fidelity Moneybuilder Income. “This aims to provide an income with little volatility. It’s a fund for the naturally cautious.”
Salary sacrifice: a smarter way to boost your pension
Tax relief on contributions make pensions an attractive way to save for retirement, but the benefits can be boosted even further using something called salary sacrifice. By giving up
part of your salary to make an additional pension contribution, you’ll lower your tax bill, and both you and your employer will save on national insurance.
For example, if you earn £30,000 and decide to sacrifice £2,000 of this for your pension, your take-home pay will fall from £23,567.20 a year to £22,207.20 in 2015/16. But adding in the £2,000 that went into your pension, you’d receive £24,207.20 – £640 more a year.
Many employers will add in the national insurance contributions they save, which, at 13.8%, would mean a further £276 going into your pension.
You do need to be careful about actively reducing your salary, as it can affect mortgage borrowing and benefits. However, Danny Cox, chartered financial planner at Hargreaves Lansdown, says that, as well as boosting your pension, salary sacrifice can be a very useful tax planning tool.
“Your income tax personal allowance reduces by £2 for every £1 of income over £100,000, so it may be worth avoiding this by using salary sacrifice to bring it below this level,” he explains. “Similarly, if you earn more than £50,000, this will affect your entitlement to child benefit, so consider using salary sacrifice in these instances too.”
I’m deciding what I want from retirement
Although Christine Massey (pictured above), a customer engagement manager from Surrey, has no immediate plans to retire, reaching age 55 has made her focus much more on what she would like to do in retirement.
“Last year I would have said retirement was five or six years away, but since turning 55 I have started to think about winding down a bit and possibly working part-time,” she says. “It was especially empowering to know I could tap into my pension if I needed to.”
Like many, her retirement income is likely to come from several different sources. She will have her company pension and a full state pension, her husband will have a couple of pension pots and they’ve both put money into Isas over the past few years to top up their retirement savings.
She says: “My pension contributions increased as my career progressed, so I’ve benefited from higher payments from my employer.” She adds: “We’ve been overpaying the mortgage to help get rid of it.”
Christine and her husband are happy to use their home to secure the lifestyle they want in retirement. “We’re prepared to downsize to release equity and we’ve even talked about living on a barge,” she says. “It’s impossible to know how long the money needs to last, but we’re happy to make some sacrifices to be able to do the things we want to do in retirement.”
Christine might be planning to enjoy more leisure time in the future, but she’s happy to include work in her retirement plans. “Work is a good thing,” she says. “It has social benefits, and a part-time job would bring some further income. It’s very exciting to think about the opportunities the future holds.”
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
An unexpected one-off financial gain in cash or shares, generally when mutual building societies convert to stock market-quoted banks. Also windfall tax, a one-off tax imposed by government. The UK government applied such a measure in the Budget of July 1997 on the profits of privatised utilities companies.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A tax-efficient way of receiving staff benefits, where an employee agrees to forego a proportion of their salary for an equivalent contribution into their pension scheme or in exchange for company car, gym membership, childcare vouchers or private medical insurance. A salary sacrifice scheme is a matter of employment law, not tax law, and is often entered by an employee who is about to move into the higher 40% tax bracket.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.