The rise of the pension millionaire
Here at BFP, we love an interesting statistic when it comes to personal finance. Recently, we have been discussing as a team some information released by the Office of National Statistics relating to recent research into pension funding in the UK:
There are currently more than 1.1 million pension millionaires.
About 174,000 savers have accumulated pensions worth more than £2million, 46,000 with £3 million.
If you have a pot worth £375,500, this would put you in the top 10% of savers, who collectively hold 64 % of private pension wealth.
The poorest 50% of savers hold just 1% of pension wealth.
While £1 million is an enviable sum to have in your pension, when looking at what it will provide in retirement, you may be surprised at the relatively modest lifestyle it could provide. As a general rule of thumb (and I must stress the general part) you should be taking no more than between 3.4% - 4% a year from your pension in retirement in order for it to have a chance of surviving as long as you do. This would give you between £34,000 and £40,000 per annum, which may not provide the luxury retirement budget you would necessarily expect, especially if you are used to being a higher earner throughout your working life. If reading this has made you think about your own provisions for retirement, it is never too late to ramp up your own savings.
Pensions are a very efficient way to build retirement wealth;
If you have access to an employer-based retirement plan, take advantage of it if you haven’t already. Employers are required to contribute at least 3% of your salary, and some even match your own level of contributions if this is higher, 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 £60,000 or to 100% of your net relevant earnings.
The government gives you 20% in basic-rate tax relief when you add money to your pension, even if you don’t pay tax or are a non-earner (though in this case you would subject to a maximum contribution of £3,600) For example, if you added £80 to your pension, the government will add an extra £20, making your total contribution £100.
If you’re a higher-rate taxpayer, you can get up to 40% tax relief. Meaning a £10,000 pension payment could cost you as little as £6,000. If you’re an additional-rate taxpayer, the relief would be up to 45%.
Make sure what you already have is working for you…
If you’ve accumulated various pension pots from previous employers, it can be 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 to give you better 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, as this might not necessarily be the right option for you.
How much is it costing you? Would it cost you more or less to move it elsewhere?
Are the underlying investment funds suitable, diversified and is there sufficient choice?
Will you lose any valuable benefits by transferring the pot? E.g.; 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)?
How we can help…
With ever changing regulation, increasing life expectancy and a state pension that may not cover the essentials, planning for retirement can be a daunting prospect for some. It is, however, something we are passionate about at BFP. We’ll start by looking at your income requirements over your lifetime, then we’ll review your existing pensions and funds and establish how much income you’ll require to fund the kind of retirement you want. Once that’s done, we can provide technical advice on pension planning and provide bespoke strategies that secure the retirement income you need. We’ll meet with you for regular Planning Meetings to reassess your position and make sure everything is still on track. Not only will it ensure you’re on track to a financially secure future, it’ll also give you more choice and a greater level of control over your eventual income, providing you with peace of mind. If you would like to discuss how BFP can help you to obtain financial wellbeing in retirement, please don’t hesitate to contact us to arrange a complimentary first meeting.
