Winning the lottery is not a sufficient retirement plan
Saving into a pension is sometimes a passive activity – money is automatically deducted from your payslip or paid via direct debit, and the hope is that by the time you finish working it will have grown sufficiently. This approach can lead to a shock as you approach retirement, though: if the investments have not performed as well as you had anticipated you may not have enough money to live comfortably.
Retirement can last for decades, so it’s important to understand reality and expectations of later life income. While winning the lottery may be the ultimate dream, the reality is most people won’t be that fortunate so will need another plan. When looking ahead to how you want to spend life after work, ask yourself what you want in that time. Do you want to continue having a holiday each year? Are you looking forward to time to relax or improving the garden? Maybe you want to develop a business, or just spend time with family? Your goals will determine how much money you will need – for example, spending time with family will be far cheaper than starting a business, and an annual holiday will add at least hundreds of pounds to your annual expenses. You’ll also need to factor in expenses, including the fact that your outgoings may be lower if you have cleared the mortgage and don’t have car finance to pay.
With your goals worked out you can start to think about how much it will cost. Maybe you need an annual income of £18,000 including the State Pension, which is currently a maximum of just over £6,000 a year, leaving you to find £12,000. At today’s annuity rates, if you had a pension fund worth £300,000, took the full 25% tax-free cash and wanted your spouse to receive 50% of your income after you died, you could receive an annual income of over £11,917 – almost exactly the amount you need.
Maximising your retirement fund
Knowing how much money you need to save is one thing, but doing it is another matter entirely. It’s entirely possible though, particularly if you diligently save and regularly check performance.
All pensions benefit from tax relief, and if you are in a workplace pension scheme then your fund may benefit from employer contributions as well. Depending on the rules of your scheme your total contribution could be more than double the amount you actually pay in – for example, if you add £80, tax relief will bump it to £100, and your employer may match that to make the total £200. If you are a higher- or additional-rate taxpayer then the tax relief will be £40 or £45 for every £100 you contribute, further increasing the size of the fund. This is free money that can really make a huge difference to the amount you retire with, especially compared to saving into a regular bank account or ISA.
If you are only just inside the higher-rate bracket, you may decide to add the amount that takes you over the threshold into your pension. Let’s say you earn £46,000, with the 2015/16 tax bracket you will be paying 40% income tax on £3,615. You could put that sum into your pension instead, which would receive tax relief at 40% rather than you paying income tax on it.
Another important factor is ensuring you have regular pension reviews. These help to ensure that your investments are performing as well as they should be, and that you are not paying too much in fees. Some schemes, particularly older ones, have high fees and poor growth, which erodes the value of your fund over time. By paying lower fees and having higher growth, you should have a much healthier fund at retirement. Like any other form of saving, you can review your own fund; but if you are not comfortable doing so, you can leave it to the experts and receive a full recommendation on how to get the most from your pension.
What are you hoping for in your retirement? Let us know with a comment below.
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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new
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