Planning for Retirement – Part 1

For most Britons in their twenties or thirties now, retirement seems like a distant proposition that can wait.

Oh, there’s still time to think about what one would do in their sixties. Isn’t there?

Not quite.

Ineffective retirement planning or the complete lack of it can leave you in the doldrums without enough income to sustain your current lifestyle.

It is estimated that more than half of the people in the UK are not saving enough or not saving at all, in order to live the kind of life they expect in the golden years.

This brings us to the most important question.

How much income do you need to maintain or upgrade your current lifestyle during retirement?

Understanding Retirement

Before calculating one’s income, it is important to understand, that retirement may not necessarily be three decades away anymore.

Many people wish to retire earlier while they still have good health, to enjoy travel and other leisure activities.

Others may wish to continue working beyond state pension age.

The first option leaves you with a risk of having a smaller state pension pot when you retire.

The second allows you the luxury of delaying drawing your state pension which means, you retire with a bigger amount.

While travel and leisure seem like an attractive part of retirement life, it is only prominent in the initial years. One needs to account and plan for healthcare costs, during the later stages of life.

All this information may seem overwhelming but it is not that difficult to ensure that you are not left cash-strapped during your golden years.

Here’s an easy-to-understand decade-by-decade guide on how to plan for your retirement income.

The 20s

The 20s are a period of turmoil in a young person’s life and there are quite a few bumps to manoeuvre. So, at this stage, your main goal should be to pay off debts if any and begin saving, no matter how paltry the sum may seem.

  • Goal 1 – Clear Debts
  • Goal 2 – Start Saving
  • Goal 3 (Optional) – Start an ISA

Having said that, this age is also perfect to start your retirement plan and one of the best ways to do it is to start a tax-free ISA. You have flexible access to the money if and when, you do need it. You are building a financial resource for the future and yes, it also allows you to make ‘savings’, a habit.

The 30s

With the 30s come new responsibilities and new challenges. You may plan to get married, buy a house or start a family. Financially, you need to play your cards right in this decade. So sit down with a pen and a piece of paper and reassess your finances.

  • Do you have expensive unsecured loans like credit cards?
  • Do you have other debts like student loans?
  • Are you planning to buy a house soon?
  • Are you saving for a contingency fund?

Once you have a clear picture of your financial outgoings, you should execute a plan towards reducing it. Work on clearing off debts first. Once you are debt free, it is time to start exploring your retirement options.

Your company may have a pension scheme that you can enrol in. Explore your options when it comes to pension schemes. The default one may not be your only choice. You can take more risks at this stage. Consider investing in shares.

The 40s 

The 40’s are usually a great time financially. You have pay raises, bonuses, your debts are cleared off and you can now start thinking about dedicating a significant amount towards your retirement income.

Yes, this is a critical period for your retirement savings. What was an option to be considered two decades ago, now becomes a crucial necessity.

Ideally, you should have some sort of retirement savings by now. But if for some reason you do not, then you are not alone. Many people start in their forties and still end up with a sizeable retirement pot. Only, it may take more effort. As Albert Einstein once famously quoted, ‘Compound Interest is the eighth wonder of the world’. Start early and you will need to save less.

Your goals during this decade should be to:

  • Dedicate more money towards retirement savings
  • Add to your ISA
  • Start saving if you still haven’t started

Do read the second part of this article to get information on retirement planning in your fifties and sixties, the years that will lead up to your retirement.

What is a Pension?

If you are in your twenties, then ‘Pension’ is not a word you will frequently hear. But you will start hearing more of it as you approach your thirties and get into your forties.

Pensions, Annuities, Retirement Saving Plans and Tax Benefits! All this information can be overwhelming to the newbie.

Well, here’s the low-down on it.

A pension is a type of long-term investment plan which allows you to save money for your retirement years. But why do you need a pension? It is a tax-efficient form of savings when compared to others, and the money that you save accumulates into a pot called the ‘Pension Pot’.

When it comes to pensions, you now have more options than ever. You can either opt for a fixed income or a flexible taxed income or take out a part or whole of it as a cash lump sum.

Up to 25% of the pension pot can be taken as a tax-free cash payment.

You can sell the remainder of the pot to an insurance company in exchange for a regular fixed income that you will receive until your death. This is called an Annuity.

There are three different types of Pension schemes – your employer may run some, and others can be set up by you. And the best part is that you can invest in multiple pension schemes at the same time or even invest in ISAs or other tax saving plans.

State Pensions

The State Pension is a payment that the government will make to you on the basis of your National Insurance Record once you attain payable age.

The current eligibility age is:

65 for men born before 6th Dec 1953

Between 60 and 65 for Women born after 5 April 1950 but before 6 December 1953

Due to the Pensions Act 2008, the state pension age for men and women will increase in the future.

To be eligible for State Pension, you must have a minimum of 10 qualifying years where you make National Insurance (NI) contributions or are deemed to have paid it.

The basic state pension in the tax-year 2015-2016 is £115.95 a week. The amount you receive may differ depending on individual circumstances.

RELATED: How to Identify a Pension Scammer

Company Pensions

Company pension schemes are set up by employers for its employees. The scheme is set up under a trust and is completely managed by trustees.

Employees can choose to join a company pension scheme and make contributions towards it every year. In addition, employers also contribute towards your pension scheme selected.

There are two types of company pension schemes.

· Final Salary Scheme: The final salary scheme is also known as defined benefit pension. It is dependent on your final salary and the number of years you have enrolled in the pension scheme.

· Money Purchase Scheme: Money Purchase Scheme is also known as a defined contribution pension scheme. Typically, you and your employer may make contributions into your pension pot. The amount you contribute, returns on the investments made with the pension funds and any charges deducted when you access the pension, will determine the pension that you receive when you retire.

Each one of these schemes has their own perks to offer, and your choice should depend on your immediate and long-term financial goals.

Individual Pensions

Many financial services companies offer Individual Pension schemes which you can keep by yourself. It is not connected in any manner to your employment status.

There are multiple choices again.

Personal Pensions: This is an ideal choice for self-employed people or for those who do not have a company pension scheme. It can be taken with you even if you switch employers.

Stakeholder Pensions: Similar to personal pensions, stakeholder pensions are ideal if you are self-employed or can save only small sums of money at this point in time. Some of the benefits of stakeholder pensions are limited charges and penalty-free transfers to other pension plans.

Self-Invested Pensions: A self-invested pension scheme provides you greater control over your investments. It is usually chosen by people who have a fair amount of financial acumen and like to make their own investment decisions.

If you still have questions in mind, you may look at our Complete Pensions FAQ.