It’s never too early to start preparing for your retirement.
The idea of finishing work and enjoying the pension fund you’ve potentially saved up throughout your working years may sound tempting, but there are several things that may be worth considering before making the decision to retire.
In our latest blog we share some of the key considerations, from setting goals to understanding your pension options.
When can I retire?
‘Retirement age’ can mean different things to different people. Traditionally in the UK, people retire around the age of 66, when you can begin to use your State Pension as income (rising to 67 in 2028).
Early retirement could therefore be any time before you reach your pensionable/State Pension age.
Retiring early can offer more years of leisure and personal fulfilment – but it also means your savings need to last longer. This is why careful financial planning could be essential in helping you reach your own long-term financial goals.
Planning for retirement.
It can be useful to start thinking about your retirement options, and the choices you’ll need to make, as a long term target.
While you may not have a solid idea of what you want in later life when you’re in your 20s, you can still put the foundations in place for retirement.
Your employer must automatically enrol you into a pension scheme and make contributions to your pension providing you meet the criteria.
The minimum contribution is 8%, usually made up of 5% of your eligible earnings and 3% paid by your employer.
In the case of most automatic enrolment schemes, you’ll make contributions based on your total earnings between £6,240 and £50,270 a year before tax.
However, you can also opt out if you wish and you can do so by contacting your pension provider. Your employer must tell you how to do this. You’ll also get back any money you’ve already paid in providing you opt out within a month of your employer adding you to the scheme.
You can also opt back in at any time by writing to your employer. However, it’s worth noting that there are certain conditions around this and they do not have to accept you back into their workplace scheme if you’ve opted in and then opted out in the past 12 months.
One of the advantages of paying into a pension to save for retirement is tax relief. Tax relief is given based on the rate of Income Tax that you pay. This is useful as it can help reduce the amount of tax you pay and potentially be used to help boost your savings for the future.
You must be under age 75 to get tax relief and there are also limits on how much tax relief you can receive and how much you can pay into a pension.
If you’re self-employed, you can set up a personal pension to help kickstart your savings for later life.
Once you reach your 50s, you can access some personal pensions from the age of 55 (rising to 57 in April 2028).
You can get free and impartial information from MoneyHelper, while they also provide a service for over 50s called Pension Wise. You can also contact your pension provider if you’re not sure when you can take your pension.
Setting your retirement goals and objectives.
It’s important at the outset to set your goal: at what age do you want to retire and how big of a pension pot will you need?
The 4% rule is a popular strategy that suggests retirees can safely use the amount equal to 4% of their total savings as a starting point for withdrawals of their pension in their first year of retirement. They can then withdraw roughly the same figure, adjusted for inflation, each year for the next 30 years.
As an example – if you retire with a pension pot of £400,000, you could safely withdraw £16,000 in your first year and potentially the same amount, adjusted for inflation, across the following 30 years.
It’s also important to consider the lifestyle you see yourself enjoying in retirement.
Taking time to work out your monthly spending can help visualise the lifestyle you can realistically afford. One tip which you may find useful when making a budget for retirement is to break down your potential future spending into two categories:
- Essential expenditure – this will cover your basic living needs, such as housing costs, eating and general groceries and day-to-day travel.
- Non-essential or ‘discretionary’ income – this will cover the more day-to-day activities such as eating out, holidays and leisure.
One thing to think about is if you still have a mortgage to pay. For example, taking money out of your pension to pay off your mortgage could have longer-term repercussions as it may mean you have less money in your pot to give you an income when you retire. However, in the short term you’ll have lower monthly outgoings. It may help to seek financial advice before making any such decisions.
It’s never too early to begin planning your future and the sooner you start planning, the more likely chance you will have of reaching your goals. Speaking to a financial adviser can help tailor a retirement plan best suited to your financial goals and personal circumstances.
Once you have a goal set, you can then proactively check whether you’re ahead or behind your target and manage your pension contributions accordingly.
Keep in mind it’s impossible to predict the markets. Past performance is not a reliable indicator of future results. Consistent investing over the long term can potentially help provide the foundation for building wealth – however, this is not guaranteed.
Setting a Will.
A Will is a legal document that describes how you would like your property and other assets to be distributed after your death.
This can help ensure that your loved ones are taken care of according to your preferences. It’s worth remembering that your pension isn’t legally part of your estate, so is not covered by your Will. However, it can still be useful to get the rest of your affairs in order.
If you are starting to think about retirement, it could be useful to update your Will and make sure everything regarding your estate is in line with your wishes.
It can be beneficial to seek out advice from a professional if your Will is not straightforward – for example, if you share a property with someone who is not your husband, wife or civil partner, or if you have property overseas.
Understanding your Pension options.
When it comes to preparing for retirement effectively, you must understand where your pensions are and the different options you have to make the most of your money.
Consolidating your Pensions.
Pension consolidation is the process of bringing together multiple pension schemes, simply by identifying what pensions you have, and then transferring them into one provider.
You may want to consolidate your pension pots if:
- Your pension scheme is being closed or wound up
- You decide to move to a new job
- You would like to transfer to a better pension scheme
- You have pensions from more than one employer and want to bring them together
While it can be convenient to see your pension performance and eventually manage withdrawals in one place, you’ll also avoid losing track of old pensions.
It’s worth taking into account that consolidating your pensions might not always be the best course of action. Some Pensions might contain guarantees that would be lost on transfer or benefit from low costs that can’t be matched elsewhere.
You can also lose any possible annuity rate if you change to another type of pension or even a different annuity provider. If you are in a pension scheme with benefits, it may be best to keep it separate rather than consolidating elsewhere, as you may lose those alongside any employer-matched contributions for example.
You can get free, impartial information about transferring your pension from MoneyHelper.
Maximising the tax benefits of Pensions.
There are many tax advantages when it comes to Pensions – tax relief on your personal contributions being one of them.
Tax relief boosts your pension pot with contributions from the government on top of your own, based on the tax you would have paid on the income.
You can get tax relief on private pension contributions worth up to 100% of your annual earnings (a maximum of £60,000). Depending on the type of pension scheme you’re in, and the rate of Income Tax you pay, you’ll either get the tax relief automatically, or you’ll have to claim it yourself.
If you have any extra disposable income, one option could be to invest this into your pension pot with True Potential’s impulseSave® feature or review your workplace pension contributions. The government will then provide tax relief based on your tax bracket. However, it’s important to note tax is subject to an individual’s personal circumstances and tax rules can change at any time.
Withdrawing your 25% tax-free lump sum.
You’re eligible to start taking money out of your Pension from the age of 55 (due to increase to 57 in 2028). At this time, usually up to 25% of your fund can be taken out as a tax-free lump sum and the most you can take is £268,275.
Taking lump sums or drawing down your Pension could give you flexibility but carries the risk of running out of money. Alternatively, you can take an annuity providing your scheme allows it, sacrificing some freedom in exchange for a secure, lifelong income. Some annuities have high management fees, so it’s worth checking beforehand. Most annuities are also not investment linked – meaning you may end up with a lower rate of income than if your money was left invested.
However, if you withdraw 25% of your pension savings, you’re immediately reducing the value of your pension pot.
It’s worth remembering that a Pension is designed to support your lifestyle for many years once you retire, and the right option will depend on your situation.
It’s never too late to open a Pension and start contributing to a pension pot – however, tax relief is only given on pension contributions if you are eligible – see eligibility here.
However, a rounded retirement plan could benefit from advice as to what is best suited to your personal circumstances and to determine the most appropriate means of funding your retirement income needs. You can also get free, impartial guidance from MoneyHelper.
We’re always here to help you do more with your money and investments, while you can also subscribe to our YouTube channel to view our regular Do More With Your Money episodes.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. This material is not a personal recommendation or financial advice and the investments referred to may not be suitable for all investors.
Tax is subject to an individual’s personal circumstances and tax rules can change at any time.
Pension eligibility and tax rules apply. You should ensure your contribution does not result in your total Pension contribution within the tax year exceeding £60,000 or 100% of your earnings, whichever is lower.
True Potential Wealth Management is authorised and regulated by the Financial Conduct Authority. FRN 529810. Registered in England and Wales as a Limited Liability Partnership No. OC356611.
True Potential Investments LLP is authorised and regulated by the Financial Conduct Authority. FRN 527444. Registered in England and Wales as a Limited Liability Partnership No. OC356027.
