From April next year, savers will be allowed to do as they wish with their nest egg when they retire. Many anticipate retirees will plough their cash into buy-to-let investments to fund life after work.
Others say they will stick with annuities and income drawdown – or even a combination of both.
But whatever you opt for, the challenge right now is to save as much as you can. Pensions, after all, are a hugely tax-efficient way of saving – essentially, you are getting free money. If you are a lower-rate taxpayer, for every £80 you save the government will top this up to £100; and if you are a higher-rate taxpayer, you need to put away just £60 to get the same amount.
Recent figures, however, from the Department for Work & Pensions revealed almost 12 million of us are still not saving enough, so whether you are retiring in the next year or have 20 years to go, we look at what you need to do now to ensure a prosperous retirement.
Saving in your 50s
Your retirement is nearly in sight. Most people at this point will be approaching, if not already at, their maximum earnings. Monthly costs, such as mortgage payments, may also have reduced but despite the greater wealth, it is still advisable to keep a firm
eye on any unsecured debts and ensure they do not become unwieldy.
At this stage, do all you can to increase your savings contributions, not only to your pension but also your Isa. Bear in mind you have an annual pension savings limit of £40,000 and that the maximum you can save over your lifetime is £1.25 million – anything on top will be taxable.
Given that you can access your pension from age 55 if you wish, you should have a good idea when you are likely to retire and how much you will retire on. The estimates you get for your eventual retirement income will become much more accurate at this point and, as such, it is recommended that you take your pension saving very seriously.
Tom McPhail, head of pensions research at Hargreaves Lansdown, says: "Your health, debts, partner's circumstances, children, inheritances will all also play a part in your decision making. Use a pension calculator to get an estimate of what your retirement savings
might produce for you. This is something you should do regularly, not just when you first join a pension; once a year is probably about right for most people."
This is also a good time, if you have not already done so, to take stock of all your different pensions, both private and workplace schemes, and consolidate them into one – though not guaranteed final salary schemes. Many savers after having possibly worked at a number of different companies may have a number of dormant plans.
You can use the government's free Pension Tracing Service (gov.uk/find-lost-pension) to track any down. You can place these pensions in a self-invested personal pension (Sipp). These pension wrappers are ideal for private pension savers too, as they can access a myriad different investments under one roof.
By getting old pensions in one place, it will make it easier to plan your strategy and deal with administration. Remember, too, that the state pension will play a big part in your retirement income, so get a forecast of this at gov.uk/state-pension-statement.
After growing your pension, most likely via riskier investments during the past three decades, you do not want to see all that hard work undone if stockmarkets fall.
Your investment strategy at this stage of life, however, should very much be dictated by how you intend to draw your income in retirement.
De-risking – the process of transferring your money into lower-risk investments – is hugely important if you are planning to trade your pension in for an annuity, which will provide you with a fixed annual income for the rest of your life, as such you want to ensure that pot is as big as it can be. As Lawson points out: "It would be disastrous to see your savings fall by 20% or 30% so close to retirement, so be very aware of the investment risks you are running."
Most pensions manage this risk automatically for you. Many company pensions apply a de-risking strategy, known as 'lifestyling', which moves you out of more risky investments such as shares and into a mixture of bonds and cash in the last 15 years before retirement. The majority of funds that employ this tactic carry the lifestyle name, so check your pension statement to see if it applies to your scheme. Otherwise contact your pension provider which will confirm whether your fund is lifestyled or not.
But lifestyling is only relevant if you want to buy an annuity at retirement. If it is likely that you will draw an income – via income drawdown, where you remain partially invested, then it makes little sense to move your money into cash and gilts. You need your savings to keep growing, and because you aren't withdrawing them all at once you have more time to recoup any short-term losses.
If you are not in a lifestyle fund but want to reduce your risk, Justin Modray, founder of Candid Financial Advice, says perhaps start by switching an equal proportion every year into cash and bonds over the period of time you want to reduce risk.
He explains: "If you are currently 100% invested in stocks and wish to buy an annuity in 10 years' time, then maybe switch 10% across to safer assets each year. But remember while gilts and deemed reasonably cautious, gilt funds could still lose you money so there is no guarantee lifestyling will prevent losses."
Also consider how soon you want to finish work because if you intend to work well into your 60s, it may be more sensible to keep at least a decent proportion in high-growth investments.
Investing in your 50s
At this stage, protecting wealth, beating inflation and generating income should be your key objectives. But you can still invest in the stockmarket.
UK Equity Income funds, which invest in dividend-paying firms, that is companies that share profits with investors, are worth a look, says Haynes who tips the recently launched Woodford Equity Income fund, which is run by star fund manager Neil Woodford.
During the 25 years Woodford ran the Invesco Perpetual High Income fund, he turned a £10,000 investment into £230,000. Connolly rates the Newton Real Return fund, which he describes as a vehicle "designed to preserve capital and beat inflation". A multi-asset portfolio, it has capital across a wide range of countries and investments including shares, bonds and cash.
Final salary savers: warning
Final salary or defined benefit (DB) pensions are gold-plated savings schemes – and, unfortunately, a dying breed. This type of plan typically guarantees a certain level of income for life, where workers get a pension based on their earnings at retirement (or a career-average).
However, many have been shut down due to their high running costs as all the investment risk is the employer's responsibility, unlike in the case of more widely used defined contribution (DC) or money-purchase schemes, where the risk is all with the employee. For savers with a DB scheme, the primary message is hold on to it. As part of the pension overhaul, the government has confirmed that final salary scheme members will be allowed to convert their plan into DC schemes, so they can benefit from the new freedoms.
But if you are a member of a final salary plan, check whether such a move makes financial sense. In recent years, many employers have offered workers sweeteners to quit these pension plans but in most cases staying put has been the wisest decision.
Find out everything you need to know about the new pension rules and how to plan ahead for the retirement you deserve with our new magazine, How to Retire in Style. The magazine is available to buy now from all leading newsagents, or can be ordered online at moneywise.co.uk/retire