Whether your retirement is a long way off or not that far into the future, ensuring that you will be well provided for when you stop working is a vital part of financial planning…
During April, as the new financial year begins, it’s a good time to review your financial situation. And one of the things that needs organising – even if it is years into the future – is your pension.
Providing for retirement is important – especially now that many of us are living longer. In the past, men might stop working at 65 and only enjoy a few years of retirement, but now, you could be at the end of your working life and have another 30 years of retirement to look forward to – that’s a long time to provide for.
How much to save?
But how much should you be putting away for your future? The simple answer is as much as you can afford, but let’s see if we can narrow that down a bit…
According to the Office for National Statistics, the average retired household spends £21,770 a year, so that perhaps gives you a clue about the income you might want to be aiming for.
According to government figures, you should aim for having a pension equivalent to two-thirds of your working income when you retire. So, for instance, if you earn the average salary of £27,000, you should aim to have a pension of £18,000 a year – that works out to about £1,500 a month for you to live on.
At the moment, the state pension is £8,546.20 a year – that’s £691 a month. So, you need another £800 a month to top that up.
According to research from Aegon, you need a pension pot of £301,500 to get that income guaranteed, assuming you retire at 65.
Remember that pension ages have changed – and depending on your date of birth, you may not be able to claim your State Pension until the age of 67. If you are in your 30s or 40s, it could rise to 68 or 69. You can check your State Pension retirement age at www.gov.uk/state-pension-age and a forecast of your State Pension at https://www.gov.uk/check-state-pension.
If you are in full-time employment, you will be automatically enrolled into a workplace pension scheme – this became compulsory in 2012. The minimum contribution is now 8%, with your employer contributing at least 3%, 4% from you and 1% tax relief. This is not on all of your earnings however as it is not paid on the first £6316.00 per year and does not trigger unless your earnings are £10,000.00 per year or £833.33 per month.
To hope for anything like a comfortable retirement, you need to be thinking about saving far more than just the minimum. According to Scottish Widows, 12% of your income is the amount to be putting away to ensure that comfortable retirement.
To give yourself a decent estimate of how much you should save, you can try an online pension calculator – try this one at the Money Advice Service. The Which? guide at www.which.co.uk. is really useful too, as it helps you focus on other financial decisions that need to be made, depending on your age. While both these online tools are useful to give you a broad overview, it is worth talking to an independent pensions adviser too.
Let’s talk numbers
So, let’s talk about some figures – the consumer association Which? has worked out that a couple aged 30 need to put away £370 a month if they are starting to save for retirement from scratch. This would see them end up with £206,500 in their communal pension pot when it comes to retirement, giving them £26,000 yearly income to draw down once they need to claim it.
Remember that the contribution figure would need to increase each year to keep up with inflation.
What if you start saving another 10 years down the line? Well, again according to Which?, that same couple would have to stash away around £487 a month if they waited until they were 40 to start saving up for their retirement and wanted the same return.
Another option if you don’t start saving until later, is to delay the age at which you take your pension, to allow you longer to build up that pension pot. This relies on you being able to work longer and to not be hindered by ill-health or other family circumstances.
Overall, the message is to start saving as soon as possible, and to save as much as you can, while you can – you never know when your circumstances might change. You might buy a house, start a family, have to look after an elderly family member or support children through university.
If there is a company pension scheme, join it as soon as possible and contribute more than the minimum. If you’re self-employed, set up a personal pension as soon as you can.
If you would like to discuss your pension provision or any other financial matters, we will be happy to help. Please contact us without obligation.
Established in Berkshire in 2004, J Finance Ltd is one of the leading financial planning companies in the area. We serve clients across the South of England including Oxfordshire, Buckinghamshire and Hampshire. If you would like to discuss this subject or any other financial matter, please contact us on 01635 521 300 or email firstname.lastname@example.org.