If you think that retirement plans are only for the super wealthy, or if you’ve just not got round to it yet, or even that you think retirement is too far away, then think again.
The value of well thought out planning from early on should not be underestimated. A well-structured retirement plan can help individuals understand what they need to be doing now, so that they can enjoy a comfortable standard of living once they stop work. It can also help individuals think about the key considerations once they reach retirement, so that they can make the most of their hard earned savings.
Yet research by the Financial Conduct Authority (FCA) has found that planning for retirement is often a low priority.
It revealed that although more than half of 25-34 year olds are putting something away, they are doing so to cover costs for expenses such as a deposit for a house or a wedding, and relatively few (16%) are saving for longer-term objectives such providing a retirement income.
The research paints a similar picture for 35-44 year olds, with one third (33%) neglecting to consider how much they should be paying into their defined contribution (DC) pension each year to maintain a reasonable standard of living in retirement.
It also found that just under half (48%) of 45-54 year olds hadn’t reviewed their DC pension in the last 12 months to see how much their pot is worth, making it difficult for many to understand what income they can expect their pension savings to produce.
Although it may be tempting to put it off for another day, the earlier you start planning, the better.
See WEALTH at work’s top tips to help individuals put a retirement plan together:
1. Consider what you want from retirement
Think about what you would like to do in retirement, how much you think that might cost and when those costs might be incurred. Your income requirements may change over time, for example, income needs are widely believed to follow a ‘u shape’ in retirement with the first ‘active’ phase being the most expensive. Spending seems to fall after a while in what is known as the ‘passive’ phase, as people become a little less active and perhaps cut back on areas such as travelling. But costs then may go up later in retirement in the ‘supported’ phase, if extra care and support is required.
2. Collate information on ALL your assets
Gather up-to-date information on all of your pensions and savings. Find out how much you can expect from your pension(s) and the value of any other savings you may have such as any ISAs or shares for example.
3. Check to see if your savings are on track
Once you have reviewed your financial position, check to see if you will be able to afford the retirement you want. You may find that you will need to save more, or work a little bit longer than you thought. Research has found that most people live longer than they expect, so you should keep this in mind when doing your sums. For example, a 65 year old man now has a 50% chance of living to 87 and a 65 year old woman has a 50% chance of living to 90.
4. Get a State Pension statement
The new State Pension depends on individuals having 35 qualifying years of National Insurance contribution. In reality, many people will not be eligible for the maximum amount of the new State Pension. Therefore, it is important that you check your State Pension record and National Insurance contributions history early. The easiest way to do this is to go to www.yourpension.gov.uk.
5. Work out which income options might be right for you
As you approach retirement you will need to think about how best to use your savings to generate an income in retirement. Guidance from Pension Wise, a free government backed service can help those with defined contribution pensions (but not final salary schemes). However many may want to consider getting financial advice. A financial Adviser should look at all of your assets such as pensions, ISAs, other savings and investments and work out the most tax efficient way for you to fund your retirement income, and put the plan into place for you.
Don’t forget that your objectives are likely to evolve over time, so ensure that you regularly review your plan to boost its effectiveness.
Many employers offer financial guidance and support in the workplace which could help you put a comprehensive retirement plan together. Speak to your employer today to see what support it has in place.
Jonathan Watts-Lay is director of WEALTH at work, a leading provider of financial education, guidance and advice in the workplace.