The research found:
As retirement income expectations change, so do the ways you can plan for your retirement. Andy Zanelli, our Head of Retirement Planning, explores your options - just look for your age range below
Is this too early to start thinking about retirement, an event that could be 50 years in the future? Definitely not.
As with all projects you need to start with a firm foundation and it is in the twenties that this should happen. It will be early thoughts at this stage, although having a date to start planning towards helps. State pension age (SPA) is a great starting point and, currently, for anyone turning 20 today this is age 68.
Having an income figure in mind at this stage may be difficult so let’s use the rounded figures from the research above to put this in perspective. If we take the higher figure of £20k per year and try to put that in today’s money terms – how much will that be at age 68? If an assumed rate of inflation of 3% per year is applied to the £20k figure, it is a sizeable £82,645 per year in today’s money term, which highlights the risk inflation can have on things!
The good news is that you have time on your side. You will probably qualify for the basic state pension – more on that later. The second thing to consider is if you are part of a workplace pension. Most employers in the UK are required to enrol you in one, or have an equivalent employer scheme, and they are extremely valuable. In the next few years the contribution rates for workplace pensions will reach 8% of a certain band of your earnings. 3% of this is paid by your employer, 1% is tax relief from the government, leaving 4% to come from your pay. The value of the workplace pension cannot be overstated and this should provide the firm foundation as you move into your thirties.
A couple of other things to consider in your twenties are whether you are one of the lucky few (very few) whose parents or grandparents set up a stakeholder pension for you when you were a child? It’s worth knowing and making that a part of the plan.
Lastly if you can afford to save/invest any extra money you will probably look at cash or ISA savings first, because of access and things like house deposits, cars and holidays. If you can put money in your pension you will get tax relief and the benefit of time. If you are a basic rate taxpayer and invest £40 per month net, from 20 until you retire at 68 this could grow to over £119,000 at an assumed growth rate of 5%.
This is traditionally the decade where it can be very difficult to balance the income versus expenditure situation. Events such as marriage, buying a home and having children may have already happened or be imminent. This is the time of resolve where your plan will be put to the test – can you keep on saving/investing or even start to increase? There are a number of positives to think about here though.
First, marriage means a partner who may have their own prospect of a basic state pension, workplace and personal pension savings so these need to be factored in. This is a great time to really think about income and expenditure – what outgoings will disappear as you get older? Will you need to rethink the retirement income figure of £20k?
Tax relief plays a big part in retirement savings/investments in a pension scheme. As discussed earlier if you pay in £40 per month the government will put in an extra £10 for a basic rate taxpayer. This is great news, however if you are a higher rate taxpayer you are entitled to reclaim an extra £10 tax relief through your tax return – even better.
To really illustrate how having time on your side works lets revisit paying £40 per month net as a basic rate taxpayer. If you now started at 30 and saved/invested until you retire at 68 this could grow to around £68,000 at an assumed growth rate of 5%. This really shows the value of starting as early as possible.
There are lots of things to think about at this stage as the nature of your outgoings change, it could be children’s university costs or a bigger home. This is also the age when most people really start to think about when retirement might be a reality. We have discussed having 68 as your potential target up to now, but will you want to work that long?
Currently you can draw your pension savings from 55 – is this too early? Will you work part-time? Lots of questions around when, but another critical one is how long you will spend in retirement? One of the big risks to your savings is longevity, which really means how long does your money need to last?
The latest life expectancy tables show that a 40 year old male can expect to live until age 80, for a female it is 842. This really brings home not only the amount of income you may need to produce from your retirement savings/investments but when, in reality, you can start to wind down.
Earlier we talked about the benefit of tax relief and it is also worth thinking about tax when you are in a position to retire. Currently most pension savings can be taken with 25% of the fund paid tax free. The rest will be taxed at your marginal rate, which could be non-taxpayer, basic, higher or even additional rate. This is another key consideration when thinking about your income in retirement. Where is the money coming from, what tax liability am I likely to have and how much does this leave me net of tax?
At this stage retirement becomes a real focus for many people. Definitely time to revisit the income and expenditure situation: some costs such as mortgage and children may have fallen away so there may be more to save/invest. Lots of the things we have discussed will be coming into clearer focus now like what is my SPA, when does my workplace pension start to pay out, what other pension savings have I got, is my intended retirement date still realistic, etc.
If you haven’t already done it then some form of cash flow planning may help here as this brings all of this to life in a graphical way that helps many of us. A key consideration when looking at your income needs is what shape are they likely to be? Retirement is no longer a set date for many people and your income might be needed to top up part-time work in the early years, and then increase as you actively enjoy your full retirement.
For most there is a period where they are not so active so the income can be reduced and this could be followed by a period where the need is quite high as care is needed. This changing shape of potential income need is sometimes referred to as the “Retirement smile” and needs careful thought and planning. The great news is that the pension withdrawal options really help with this planning.
Now is the time when you are hopefully enjoying the longest holiday of your life: retirement. However this is when the real planning you have been doing becomes reality and you need to put those plans into action. The new pension rules allow a number of flexible withdrawal options where you can draw on your pension savings – which one is right for you?
The key here is to keep reviewing your plan and taking the income you need from the right place and looking to do this as tax efficiently as possible. Should the money come from the pension scheme or an ISA? Have you used all of your personal allowances to minimise tax? It may be time to revisit longevity, has anything changed which could impact the income you had planned for?
Some people may find that they have a number of smaller pensions from previous employments and it may be beneficial to bring these all together into one place. This is not exclusive to this stage of life but this is where it usually happens – it could be a good idea all through the journey.
One other aspect to consider at this stage is whether you will have any pension savings left over when something happens to you, who do you want them to go to. The new rules have made this type of asset a very attractive and tax efficient way to pass your wealth on to the next generations.
In summary there are a number of things to think about at the start, during and towards the end of the retirement journey. I have highlighted different aspects at different life stages, but it’s fair to say that most of them apply at any stage. The key thing is that if you give it the thought and planning it deserves achieving the retirement of your dreams is within your control.
1 All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2,532 adults. Fieldwork was undertaken between 15 - 16 April 2014. The survey was carried out online. The figures have been weighted and are representative of all UK adults (aged 18+).
2 Figures from ONS