We are often told the earlier you start planning for your retirement, the better. This might be true but deciding where to start can be quite overwhelming. In this article we look at how you should begin your retirement planning journey, as well as the options available to you to maximise your finances in retirement.
Start with a goal and work backwards
Many individuals will see their spending habits change as they move into retirement. Do you want to go on holidays? Do you want to eat out regularly? Do you want to move house? It’s important to set realistic expectations of your post-retirement spending habits and how much flexibility you need, when formulating a retirement plan.
What can be helpful for lots of people is to decide what standard of living they want to have during their retirement and when they’d like to retire, and to then work backwards with this figure in mind. This helps provide you with something to aim for and can make a comfortable retirement seem like a real possibility.
A tool you can use to establish your income needs during retirement is the retirement living standards website. You can compare the level of spend you want in your retirement against the amount you will need, therefore identifying a rough figure you can work to. Thinking about your ‘non-negotiables’ and ‘nice to haves’ for retirement can really help you to have clear objectives in mind, and you can then start to look at the most effective way of getting there and what age you are likely to be able to retire.
Keep in mind that the earlier you retire, the longer your funds are going to have to last. If you are looking to retire at age 55, your funds would need to provide you with 30 years’ worth of income to cover the average life expectancy.
Understanding your pensions
In the years ahead of retirement, getting to grips with understanding your assets and potential income sources will help you determine what steps you need to take to fund your desired lifestyle.
Your State Pension provides a solid foundation in providing you with an income stream throughout retirement. It is important to note there are some upcoming changes to the age in which you can receive your State Pension and also when you can access most other pensions, so you need to bear in mind you will now have to wait longer.
The Government has confirmed the State Pension age will rise to 67 in 2028. Currently, the full new State Pension is £203.85 per week, but the amount you receive will depend on your National Insurance (NI) record and the number of qualifying years you have.
To get the full new state pension, you’ll likely need at least 35 qualifying NI years, though some people may need a lot more depending on their contribution history. Normally you can buy back up to 6 years, however there is a currently a key window of opportunity to plug gaps since 2006 and the deadline has just been extended to 5 April 2025. It’s important you check whether it’s worthwhile in you paying for any missed years, as for some individuals there will be no benefit in paying in extra.
For most other pensions, the normal minimum pension age is increasing from 55 to 57 in 2028. Over the course of your working life, you may have changed jobs and opened several workplace pensions. If you’ve misplaced your workplace pensions from over the years you can use the government’s free Pension Tracing Service to locate these policies.
You’ll need to understand what level of income these funds can provide you with and what flexibility you have. Some schemes will pay you a guaranteed income for your lifetime which will be based on your salary and how long you’ve worked for your employer. Others do not provide any guarantee, and the income you receive depends on the amount you and your employer (if applicable) pay into the pension and the investment returns.
Thinking about more than your pension
While pensions are still the most important part of your retirement planning, the rising cost of living, changing legislation and uncertainty in the investment markets means there are plenty of other things you can be thinking about when planning your retirement.
Check your employment benefits
Do you have resources or protection in place to effectively ‘insure’ your retirement? If you are unable to work due to sickness, you could see your earnings fall which means you have less disposable income to put aside for your future, making it more difficult to maintain your desired lifestyle.
Some employers offer income protection which protects against loss of income. Such policies provide a proportion of your lost earnings if you are unable to work due to illness or injury.
If your employer does not offer these benefits, or you are self-employed, you can set up an insurance policy yourself.
Review your savings and investments
Put your savings to work by finding the top interest rate savings account. With inflation on the up, in real terms your money is probably losing value, so maximising your returns can help to reduce the impact. If you can lock away cash for a fixed period, you can usually achieve a higher interest rate, but be mindful you can’t access the funds until maturity unless you pay a penalty.
In addition to a pension, you may have other long-term investments that need reviewing to take into account your longer-term goals and attitude to risk.
Paying off debt
As we are coming out of a long period of low interest rates, many of us are likely to have items on credit, loans, or large mortgages that we are slowly paying off. When planning for retirement it is worth spending some time looking at each of the debts you have and determining whether you should try to reduce your debt now or not.
Some lenders will allow you to overpay to reduce your debt, some may have early repayment charges or not allow you to overpay at all, while others won’t have any such limitations. This means you should always find out what the implications are of reducing debt before going ahead with it.
You should look at your finances holistically to understand where it is best to keep your money. If you need to use money from savings or investments to pay off debt, it may be more financially beneficial to keep your money in a savings account which is getting a higher return rather than paying off lower interest debt, for example.
Review your savings and investments regularly
It’s important to review your existing arrangements as some changes may be required to support your longer-term objectives.
The products available and legislation are constantly changing, so regular check-ins are a must to ensure your plans remain relevant and up to date throughout life’s journey.
Working with us to create a retirement plan
Our approach to financial planning is designed to provide some structure to your finances and to help provide you with the clarity you need to make important financial decisions.
We would look at how you want to spend your retirement, assess your assets and create a lifetime financial forecast – a strategy for you to get there. This can help you understand:
- what level of spending you can undertake while you are approaching retirement and the impact this will have
- the age you are likely to be able to retire
- how your level of risk can affect the value of your assets in retirement
- your plans for later in retirement
If you are in the process of saving towards or planning your retirement and want to understand more about how our team of financial planners can help you, contact us today.
The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.
The information contained within this blog is for guidance only and does not constitute advice which should be sought before taking any action or inaction.