Your 10-year retirement plan
If you are in your 50s and financially unprepared for retirement then the good news is you’re not alone. The bad news, however, is that you’re fast running out of time to avoid poverty in later life.
Despite the vast majority of people in this age bracket accepting a plan is essential, one in five still hasn’t put one in place, according to a depressing study published by Barclays Stockbrokers.
Such findings make grim reading, warns Catherine Penney, vice president at Barclays Stockbrokers, who is worried so many people are approaching retirement without enough money to look after themselves.
“With so many people facing much more immediate demands on their money, such as mortgage repayments or paying for university, it is only natural that these later life concerns can often fall by the wayside,” she says.
But people need to consider that around a third of our lives can be spent in retirement – and those years should, in theory, be among our most enjoyable and relaxing. So the question of how this will be funded needs to be answered as early as possible.
The gradual demise of the final salary scheme, where workers knew they could rely on a steady income for the rest of their lives after giving up work, along with the meagre state pension, means you’re unlikely to live a life of carefree abandon.
In fact, without adequate resources you won’t be able to sustain basic living standards, let alone have enough for luxury foreign holidays, indulging in new hobbies or giving your children a helping hand.
There is no time to lose, as the days of being able to rely on the state or your employer to provide you with a comfortable standard of living are long gone. Patrick Connolly, a certified financial planner at Chase de Vere, says: “If you’ve done little retirement planning, then you may struggle to achieve the standard of living you want in later life. You’ll need to make some compromises in terms of having less income in retirement or working for longer and retiring later.”
Even those with company and private pensions may need to find ways to give their retirement pot a much-needed boost when they are in the countdown to giving up work and taking things a bit easier.
So what should you do? Have you left it too late to start a pension? Do the new regulatory changes make it easier or harder to make up for lost time? Are there other savings products that have a better chance of delivering the results?
1. Assess your situation
First take stock of what you have in place, including savings, investments and any company or private pensions. Bill Marshall, a chartered financial planner at Lamb & Associates, says: “If you run a business, then look to see if it’s something you can either sell or turn into a franchise operation. Also consider your properties – you might be better off selling up and renting.”
Next, you need to forecast your income needs in retirement. Independent financial advisers use lifestyle questionnaires that take into account everything you may spend your money on in the future. They use these to estimate how much people need to have saved by retirement.
“You need to go as far as what car you have and how often it’s replaced,’” explains Mr Marshall. “Drilling down this far will show how your spending will change when you’ve got more free time and enable you to project it forward.”
Have a look at the pension calculator on the Money Advice Service website at Moneyadviceservice.org.uk/en/tools/pension-calculator and consider requesting a State Pension Forecast to see how much you will be get from the government.
“I have cut my living costs by 60%”
Lynne Murtagh is planning to retire next year so has been boosting her pension through a combination of downsizing, cutting her expenses and putting away as much money as possible.
Although the 54-year-old has paid into company pensions throughout her working life in financial services, she has also looked to build up savings to protect her from the possibility of job losses.
And she has been upping the amount of assets she has at her disposal over the past few years to increase her chances of enjoying a decent quality of living with her partner when she finally gives up work next year.
“I have always been in jobs that have tended to be volatile and vulnerable, so being able to access savings and having flexibility has always been important to me,” she says. “I’ve always preferred having a pot of money available to use.”
This approach has enabled her to take advantage of deals, whether that’s been attractive interest rates on savings or investments such as property. Anything and everything can be considered when cash is available.
Downsizing from a large apartment within an historic 400-year-old house – and the associated high management fees and service charges – has been one of the main ways in which she has bolstered her retirement income.
She now has a more traditional three-bedroom, detached house with a garden in Nuneaton, Warwickshire – and has been spending money on making it more energy efficient to help save costs in the future.
“My main focus was to reduce my monthly outgoings and to release some of the equity locked up in the property,” she explains. “As well as having a lump sum to use, I have also succeeded in cutting my living costs by 60%.”
2. Consider your investment vehicles
Once you know how much you’ll need in later life, it’s time to consider what investment vehicles will be most suitable to build a fund that will provide this income. Jason Witcombe, director of Evolve Financial Planning, says: “People automatically think of pensions, but a successful retirement just means having enough money to pay the bills. “They may have spent time paying down the mortgage which is just as admirable as paying into a pension or individual savings account (Isa).”
One crucial element is keeping your outgoings to a workable minimum. For example, you’ll have essentials such as council tax, while other bills, including eating out and satellite television, will be discretionary.
“Unless you can create a surplus of income over expenditure and put that to use by saving and investing, you’ll struggle to build up enough money to retire,” he adds. “For those on the housing ladder, properties will probably solve the problem, however unappealing it may be to downsize from a home you’ve lived in for a long time.”
3. Think about pensions
If you haven’t started retirement planning by your mid-50s, there’s no quick fix – but there are some practical steps you can take to improve your position, according to Tom McPhail, head of pensions research at Hargreaves Lansdown.
“You can join a workplace pension and get the benefit of your employer’s contribution,” he explains. “It’s free money, so it makes a lot of sense – and under the new pensions freedoms you can also take it out when you reach the age of 55 anyway.”
As far as private pensions are concerned, you’ll need to decide how much involvement you want in the day-to-day running of your investments. If you’re fairly disengaged and prefer a ready-made investment portfolio, then maybe consider the ‘default option’ in a stakeholder pension.
These low-cost (typically with no more than 1% annual charge), no-‘frills pensions have been around since 2001 and are aimed at those on low and middle incomes, for whom standard pensions were too expensive or unsuitable. Aviva’s stakeholder pension was a ‘clear winner’ in the Moneywise Pension Awards 2015, thanks to a good fund range and low costs. You can start it with just £20.
If you’re in your 50s, then you’re probably still looking at an investment horizon of at least a decade before you retire. It’s still worth investing in the stock market and trying to make your money grow than parking it in cash where you’re lucky to get one or 2% interest. If you're not prepared to take the higher risks of moving out of cash make sure you're getting Moneywise's best deals for your savings.
You can then make the most of the new pensions freedoms that allow you to take the money out as you wish. HMRC figures reveal that more than 230,000 have accessed £4.3 billion flexibly from their pension pots since April 2015.
However, Richard Parkin, head of pensions at Fidelity International, warns: “Choices made at retirement cannot be easily undone and people will benefit from seeking expert help even if only looking to take part of their savings as cash.”
4. Boost your retirement pot
As well as savings, investments and pensions, there are other ways to bolster your provision for later life. The first is to consider equity release options, which enable you to access the cash tied up in your own home.
However, Mr McPhail warns against rushing into such a plan too early in life. “It can work well if you’re in your 70s, but doing it in your 50s isn’t such a good idea because you won’t be offered a very attractive deal from providers,” he says.
Of course, you can always consider working longer – or even setting up your own part-time business to earn some extra money. It all depends on your individual circumstances and how much you will need to live a comfortable retirement.
So where does that leave the over-50s? Even though it won’t be easy to make up for lost time, the fact is that putting something away now is better than nothing at all.
“There’s no sugar for this pill and it won’t get easier if you ignore it,” says Mr McPhail. “There’s a lot to be said about grasping the nettle and exploring your options. Once you’ve overcome that hurdle, you’ll know where you stand and what can be done about it.”
The overall asset mix
When you’re trying to maximise your retirement pot later in life, time is not on your side. At this point, you’ll need to decide whether you are a low-, medium- or high-risk investor – based on your attitude to risk and the impact you’d feel losing it all. This will then affect your asset allocation strategy - how you divide your investments between different types of assets such as shares, bonds, property and cash.
For example, people in their 50s with larger risk appetites could consider having 70% of assets in shares as these have the best chance of strong returns, albeit with a higher risk of losing money. A further 15% each would go in fixed interest and property.
A medium-risk investor would be better off with less in shares – around 50% – with the rest being divided up with 35% in fixed interest and 15% in bonds. Low-risk investors, meanwhile, are likely to have 30% in bonds, 55% in fixed interest and 15% in property.
“The last thing you want to do is to retire with no money”
David Fishlock, from Marton, Middlesbrough, decided to step up his retirement planning seven years ago after turning 50. “At that point, you realise that the last thing you want to do is retire with no money,” he says.
One of the biggest changes he has made is to invest in lump sums rather than through regular investing, along with moving some money out of Isas and into pensions in order to take advantage of the tax relief on offer.
“You understand the urgency of getting the money in as quickly as possible in your mid-50s,” he explains. “It’s fine putting it in monthly when it’s got 20 years to grow, but there’s not much point if it’s only got a few years.”
He didn’t fancy the idea of being employed long into his retirement, believing “the longer people work, the shorter their lives tend to be”.*
“In this modern age of stress and strain, if you’re working until you’re 70 years old, you haven’t got long left,” he says.
Aside from moving money into pensions, he has also been putting as much as possible into Isas – mainly stocks and shares Isas – as he believes these will provide him with some much-needed financial flexibility in later life.
“The idea is to build up a capital sum within Isas, which I might be able to draw a tax-free income from when I retire,” he explains. “In fact, I might actually be able to use that without tapping into my pension.”
* Moneywise says: This is an urban myth. A ground-breaking piece of research in May 2013 by the Institute of Economic Affairs found that later retirement should, in fact, lead to better average health in retirement.
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.
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 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 form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).