The sooner you start planning for later life, the more likely you’ll be able to afford the lifestyle you want. Find out the steps to take whether you have decades or just months to go
Starting at 30 or more years before your target retirement date and counting down to your final 12 months in work, we run through the main considerations and actions to take at each stage to ensure you are retirement-ready.
30 or more years to go…
It is never too early to think about the life you would like to lead in retirement.
While it may feel like a long way off, the sooner you start saving the better off you will eventually be.
The first step is to make a plan: work out how much you are able to save, the returns you want from your investments and how you will make use of pensions and Isas to save.
Get into the habit of making regular payments and make sure you increase contributions whenever you get a pay rise – before you get used to having the extra money.
This may be easier said than done, as you may still be paying off your student loan, saving for your first home or struggling with high living costs. However, it is well worth saving even small sums as actions taken 30 years out from retirement will have a huge impact on the size of your pension and when you will be able to retire.
One of the biggest advantages of saving early is the power of compounding interest. This effectively means earning ‘interest on interest’ and turbocharges the speed at which your savings grow over the years.
In fact, someone who starts saving at 21 and stops at 30 would end up with a bigger pension pot than someone who starts at 30 and stops at 70, according to research company CLSA. This assumes both savers enjoy the same returns of 7% every year.
As a starting point, make sure you are signed up to your workplace pension. Under auto-enrolment rules, eligible employees will be automatically signed up to their workplace pension. Although you can opt out, this rarely makes sense.
Roland Jones, a chartered wealth manager at Harpsden Wealth Management, says: “Even if you only pay the minimum, join so you can benefit from the company contributions as well.”
From April 2019, employers are legally required to pay a minimum contribution level of 3% into a pension, while employees must pay in at least 5%. Some employers may contribute more.
“It is a good way of building money up without thinking too much about it,” says Graeme Mitchell, managing director of financial advice firm Lowland Financial. However, he stresses that while it provides a foundation it can’t be relied upon on solely to provide the nest egg required for retirement.
“Auto-enrolment is just a piece of the puzzle – it is not the whole puzzle,” Darren Lloyd Thomas, a chartered financial planner at Thomas and Thomas Finance, adds.
He suggests paying as much into your scheme as you can, especially if your employer is able to match your contributions.
If you don’t have access to a workplace pension, you can start your own pension. If you are self-employed, you can set up a simple defined contribution pension via the National Employment Savings Trust (Nest). Alternatively, you may wish to set up a self-invested personal pension (Sipp) via an online investment platform, such as Hargreaves Lansdown or interactive investor (Moneywise’s parent company), where you will get a wider choice of investment options. Consider costs and charges, as these can have a significant impact on your returns.
Pensions will also benefit from tax relief – effectively a refund of the tax you paid on your earnings and means that basic-rate taxpayers – who receive 20% relief – only need to pay £80 to invest £100 into their pension. Higher-rate taxpayers receive tax relief of 40% and additional-rate taxpayers get 45%.
This tax relief means pensions are usually better for building your retirement savings than an Isa. However, as you don’t pay tax when you take money out of your Isa the latter can still be a useful complement to pension income in retirement.
Isas are also good for tax-free saving and are accessible should you need them before the age at which you can access pensions (55 at the moment and 57 from 2028).
Mr Thomas suggests taking considerable risk with your retirement savings, given that it is still a long way off. Higher risk increases the likelihood of greater returns, and you have time for your investments to recover if they take a hit. This could involve having a large allocation to global equities, specifically growth stocks, and a lower exposure to cash and bonds.
The key is to invest regularly into the stock market because this can average out the peaks and troughs associated with investing over time, known as ‘pound cost averaging’. You can ask your workplace pension provider how your savings are invested and most will provide different options.
With 30 years to go, you may wish to work with a financial adviser or wealth manager to devise an investment strategy. Alternatively, you could select a growth-oriented, ready-made multi-manager fund or portfolio via an investment platform.
The sooner you start saving, the better…
What happens if someone with average earnings of £28,000 is hoping to retire at 65? The table below shows how much they and their employer need to contribute either to reach a £300,000 pension pot or to generate a total income (including state pension) of two thirds of pre-retirement earnings. The table compares what happens if they start at the age of 25 versus 35 versus 45.
HOW YOUR STARTING AGE AFFECTS PENSION GROWTH
|Contribution required for different starting ages|
Shown as a monetary sum per month and as a % of salary
|Age 25||Age 35||Age 45|
|Targeting a fund at retirement with an equivalent value of £300,000 today||£430/18%||£630/27%||£1,050/45%|
|Targeting a fund at retirement to offer a 67% income replacement*||£370/16%||£550/23%||£900/39%|
Notes: * This includes the value of the state pension – for example, 67% replacement of £28,000 income is £18,700. State pension is £8,500, so you need to fund £10,200 a year from your accumulated pot. Source: Royal London, March 2019
20 years to go…
At this stage, the key focus should be on building and increasing contributions to your pension, as well as making the most of your annual Isa allowance.
Mr Thomas acknowledges that this can be tricky as some parents face the double whammy of a big mortgage and education costs, but recommends trying to pay in as much possible to reap the benefits later on.
He also suggests thinking about reorganising any debt you have to provide some breathing space during your so-called ‘golden’ years. This refers to the period ahead of retirement, when your earnings are high and you have fewer financial obligations. For example, paying off your mortgage five to 10 years ahead of retirement could enable you to step up pension contributions. Ultimately, this could mean that you are able to retire earlier than planned or work part-time in the run-up to retirement.
At this point, Mr Jones says a higher-rate taxpayer should consider a salary-sacrifice arrangement with their employer. if they haven't already. This involves paying pension contributions from your gross salary, so the employee and employer pay less in national insurance contributions, ultimately providing a boost to pension contributions.
Mr Thomas suggests leaving the underlying strategy unchanged with a focus on stocks and shares, specifically growth companies.
“You have got to be prepared to tolerate the volatility of the markets and remember you are able to exploit pound cost averaging. Even if markets crash, you can buy in at cheap levels – so it is worth keeping risk and volatility up,” he explains.
How can a financial adviser help?
A professional can help you navigate the complex world of retirement planning by:
- Setting up a pension
- Investing a pension and monitoring it on an ongoing basis
- Planning how much money you need to save and how to achieve your goals
- Making the best use of your pension allowance and tax relief
- Deciding whether to buy an annuity or draw down your pension
- Understanding when to make withdrawals from your pension and potential tax implications
- Managing a pension in drawdown
15 years to go…
At this point, it is important to review your retirement plan with your partner if you have one – and if you haven’t made a plan yet, make sure you put one in place and start saving as much as you possibly can.
“I encourage people to sit down as a couple and consider: if you retired tomorrow, how much income you'd want,” says Steve Wilson, a director at Alan Steel Asset Management.
This provides you with a chance to work out whether the assumed growth rate of your pension, savings and planned pension contributions can deliver the income you desire.
Toby Alcock, a chartered financial planner at Lockhart Capital Management, says this process will help you work out whether your objectives are realistic. Once expectations have been adjusted, he says you can “start to build a track to run on”. This plan can be updated each year, in line with life’s twists and turns.
Financial advisers typically use cash-flow modelling tools to illustrate how much your savings will need to grow to deliver the income you require, as well as the amount of risk you will need to take.
You can access these tools via apps, such as 7Imagine from Seven Investment Management or through your workplace pension or personal pension provider.
Also check the value of your state pension to find out how much it is likely to be once you retire on Gov.uk/check-state-pension.
Carl Drummond, a senior wealth planner at Sanlam Wealthsmiths, suggests requesting a state pension forecast every five years so that you can make any contributions to get back on track.
It is also worth obtaining up-to-date valuations from all of your private pensions to build a picture of the savings you have accrued.
At this stage – when your earnings are likely to be around their peak and your mortgage and any children hopefully less of a financial strain than they were – it is important to pay as much into your pension as you can.
“It is about understanding what you are able to put in because the pension landscape changes. At the moment, you have an annual allowance of up to £40,000, but for those who earn more than £150,000 that annual allowance tapers down,” Mr Alcock explains.
“For high earners, it is really important that they understand what they are able to put in each year and whether they are in a position to maximise that,” he adds.
Alongside your annual pension contributions, consider using your annual Isa allowance. Any pension income you have could be subject to income tax, so money in Isas can provide a handy source of tax-free income or lump sums once you retire.
At this point, you should ensure you have completed an expression of wishes form, outlining whom you would like to leave your pension to in the event of death. This is particularly important because pensions will not be covered by your will but can be passed on to your beneficiary of choice, free of inheritance tax.
10 years to go…
With around a decade to go, you should review any legacy pensions to assess whether it would be beneficial to consolidate them. By the time you reach your 50s and 60s, you may have a handful of pensions from previous jobs – covering defined contribution, defined benefit or personal pensions – some of which may not have been touched for years.
A financial adviser can help you to review your pension arrangements, providing insight into the pensions that are worth keeping and those that should be combined. If you do this yourself, take a look at the charges on each pension and the impact they are having on your pot, any potential penalties, the benefits on offer and the investment strategy that is being employed.
In some cases, consolidating pensions can reduce the overall level of charges within your pot. “But even more importantly, it means we can control the level of risk properly within the pension,” Mr Drummond adds.
Tackle multiple workplace pensions
Steve Webb, former pensions minister and director of policy at Royal London, shares his tips:
- Keep your paperwork somewhere safe. Throughout your working life you could end up with many different pensions. A good filing system is essential to keep track.
- Notify your old pension schemes of your contact details – especially if you’ve moved house – or they could lose track of you.
- Update your records. Make sure all your old pensions will go to the person you want to receive them if you die. Your preference may have changed.
- Stay updated. If you can’t remember what happened to an old pension, you can use the government’s free Pension Tracing Service (Gov.uk/find-pension-contact-details).
- Check the charges. Consider consolidating pensions, but work out whether it will be worthwhile and charges you might incur.
Five years to go…
If you have a defined contribution pension, it is important to review how your pot is invested to make sure you are taking appropriate levels of risk to generate the required returns.
Also ensure your portfolio is diversified: avoid taking on too much risk at this stage – the last thing you want to do is jeopardise the gains you have made so far. You can also book a free Pension Wise appointment to get an insight into the next steps to take.
As at 15 and 10 years, you should check your state pension forecasts and get up-to-date valuations from existing pensions to check you are on track.
Around the five-year point, you should also think about whether you would like to convert your pension into an annuity. This is a secure income for life, paid out by an insurance company.
The alternative route is to move your pension into drawdown. This means drawing a variable income directly from your pension, which remains invested in your retirement. While a drawdown strategy can produce a healthier income than an annuity, it is not guaranteed and you could run out of money.
There is no right or wrong answer and much will come down to your priorities. For some individuals, a combination will make sense.
“An individual might want to consider an annuity to provide some guaranteed income for the level of expenses they need and put the rest of the money into a flexible drawdown, so they can draw income when they require it,” Mr Drummond adds.
Finally, it still makes sense to pump as much into your pension as possible and consider paying any bonuses or windfalls such as inheritances into your pension. Although you may not have such a long investment timeframe at this stage, tax relief will still give it an instant boost.
If the amount you wish to contribute exceeds £40,000 during a tax year, you can carry forward any annual allowance you haven’t used during the previous three financial years.
One year to go…
It’s now time to start thinking about logistics. First contact your pension providers to request up-to-date valuations for all your pots.
Up to two months before you reach the state pension age, you will receive a letter from the government outlining how to claim your pension. You can do this online, over the phone. or you can download a claim form online (form BR1) and post it to your local pension centre. (You can defer this if you retire after your state pension age – just don’t put in a claim.)
By this point, you should have decided whether you want to buy an annuity or go into drawdown. If you have opted for the annuity route, the process of de-risking your portfolio should hopefully be under way.
Always shop around for the best annuity and declare any health problems you might have as this could get you a better rate.
Alex Brown, wealth management director at Mattioli Woods, suggests allowing a month to shop around. From his experience, it can then take another month to transfer pension assets to the insurer. You may also need time to amalgamate several pensions.
For those opting for the drawdown route, you’ll also need to shop around for the right provider, as charges can vary significantly.
You will need to consider your investment strategy and how much you can afford to withdraw. Think about how you will access your income. Will you take your 25% tax-free lump sum right away or in stages? You may prefer to draw from your Isas and cash savings initially, allowing your pension to continue to grow.
If you like the idea of remaining invested in retirement but find the task daunting, it is worth hiring a financial adviser to do the legwork for you. They can chart a plan of action and work out the most tax-efficient way to draw down your retirement income. This will involve looking beyond your pension, factoring in Isas and other savings.
Is it worth paying for financial advice?
Good financial advice doesn’t come cheap. The Money Advice Service estimates the average hourly rate for an adviser is £150. Some advisers charge up to £300 an hour. Looking beyond the charges, it is worth considering the value that a good adviser can add. Research from the International Longevity Centre, carried out in 2017, suggests that affluent individuals who sought advice were, on average, £30,882 better off than those who didn’t get advice. Meanwhile, those who were ‘just getting by’ were on average £25,859 better off than those who didn’t get advice.