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.
However, if you have any debts, be they credit card debt or loans, it makes sense to prioritise paying them off. You don’t want to be carrying them into retirement with you.
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.”