It’s never too early to start planning for retirement
Let’s face it, in your 20’s and 30’s, there’s a lot going on. You’re busy setting up a life of your own and there are so many things that will be competing for a slice of your take home pay. Whether it’s travel, buying your first home or maybe even starting a family, at this stage in life, planning for retirement can easily sit firmly at the bottom of your list of priorities. After all, retirement is so far away, there’s plenty of time to catch up, right?
Well, Yes! But it’s for that exact reason that you have an opportunity to reap large rewards, for little effort. Many don’t realise quite how significant the advantages are of starting to save early on.
Every ten years you wait to start, you may need to pay in up to double to get the same pension income.
At the moment, the State Pension currently stands at approximately £9,110 per annum, which for most isn’t enough to even cover the essentials. In addition, for those in their 20’s and 30’s, it’s looking likely that the State Pension age is going to be around 70…Something to think about if you are planning to retire well before then.
So, how much are you actually likely to need when you retire and what do you need to put away each month to make sure you have that?
An extensive survey carried out by Which? found that, on average, retired couples need:
· £18,000 per annum to cover essentials such as food, energy bills and transport
· £27,000 per annum to fund a comfortable lifestyle, allowing for some extras on top of the essentials
· £42,000 per annum if you include luxuries like long haul trips and a new car every five years
So, taking the figure of £27,000 which covers the essentials and the odd holiday, Which? worked out that to generate that kind of annual income a couple would need a defined contribution pot of £215,450 in today’s money, as well as their full State Pension.
This means that if the couples are starting from scratch, they’ll need to save the following every month:
· Aged 20: £271
· Aged 30: £352
· Aged 40: £489
· Aged 50: £824[1]
The older you are, the more daunting it can feel to get saving. If you have a little foresight when it comes to saving early on, you can really make those extra years count.
What can I do right now?
· If you have access to an employer-based retirement plan, take advantage of it. Most employers are required to match some of your contributions, so you'll benefit from having an extra boost to your savings.
· Set up a regular savings plan. If you are self-employed or simply want to pay more into your pension, then you can pay in and get tax relief on anything up to the annual limit of £40,000 or to 100% of your net relevant earnings.
· Got a pay rise? Don’t forget to increase your pension contributions by the same percentage.
I’m not starting from scratch, but I’m not sure what I have…
It’s not uncommon to have accumulated various pension pots from previous employers. When this happens it’s hard to keep track of what you have, where it’s held, and how much it’s costing you.
If this sounds familiar, you may want to consider consolidating all of your small pots into one. This way, with everything in once place, it gives you control and a comprehensive view of where you’re at now and if you’re on track for the future. Before you do this, there are some things you need to consider:
· How do the costs compare to where you want to transfer it to?
· Are the underlying investment funds suitable and is there sufficient choice of funds?
· Will you lose any valuable benefits by transferring the pot? Examples include a guaranteed annuity rate, the right to take more than 25% of your fund tax free, or a pension paid to your spouse when you die
· will you be charged an exit penalty or face a market-value adjustment (MVA)?
I know I have a pension but don’t know how to track it down…
If you’re not sure where to start with tracking down lost pension pots, visit https://www.gov.uk/find-pension-contact-details which will help provide you with the contact details you need to find it.
Your retirement should be an enjoyable prospect, not a daunting one. And it can be. With the right guidance and financial planning, you’ll be able to put in place a long-term retirement plan that can help put you on track for the life you want.
[1] figures assume an annual return of 3% on savings. Research is based on responses from 6,000 retired and semi-retired couples Which? members in April 2019. Source: https://www.which.co.uk/money/pensions-and-retirement/starting-to-plan-your-retirement/how-much-will-you-need-to-retire-atu0z9k0lw3p
