A common question – I get asked in employment. Is how can I achieve a better lifestyle or level of income in retirement.
It may well be that you have been paying into a workplace or private pension for many years. During your employment and working career.
So hopefully you can take some action steps ahead of retiring to improve your long awaited retirement.
The vast majority of people spend nearly 40 years in active employment.
The idea of retiring is the chance to spend quality time with family and loved ones.
So they can travel, pursue hobbies and pastimes, look after grandchildren, socialise with friends a lot more.
By taking some simple steps, hopefully they can enjoy their later years in a more fulfilling way in a less stress free environment.
So what steps should we consider !
The accumulation phrase:
Most people are now enrolled automatically into a workplace defined contribution (DC) pension.
At present you will pay a minimum of 4% into your scheme. Your employer will add at least 3% on your behalf. Plus the government will add 1% tax-relief into your pension automatically claim on your behalf.
You can pay more in the pension. Through something called your annual allowance (currently £ 60,000 per tax-year or lower salary amount).
You can contribute to a pension to age 75 and obtain tax-relief.
If you aren’t working, you still can contribute but you are limited to £ 2,880 (net) but HMRC will add tax relief up to £ 3,600 (gross) per annum.
See blog post on AE: https://moneyminted.co.uk/auto-enrolment-pensions-a-basic-introduction
Most people think they are limited to contributions set by your employer and that specific scheme.
So you could increase your contributions, and your employer give you more free money.
Or, you could increase contributions through something called salary sacrifice. So you pay less tax and NI on your income through employment.
You could also increase contributions through direct debit or standing order directly with your provider. Or you could add ad-hoc lump sums.
So check with your current empire or pension provider what rules are in place to allow you to increase contributions and pot value.
But be aware the employer may not increase the level of contributions. They may restrict to a set % level.
How can I track my current pension value ?
If you are contributing into a workplace or private pension they should provide you with an annual benefit statement.
- It will provide details of contributions paid into the scheme, plus tax relief added.
- Where your funds are invested and fund values.
- Fees and Charges payable.
- Selected retirement date or default age.
- If any special features or benefits are included. (such as GAR / with profits)
- It should also provide illustrations for pot value at dates in future.
So have a look at what you pension is worth now and what value it could achieve in later years.
The vast majority of people just see a headline figure. But they have no idea how the fund is performing, is it constantly making money or losing money.
If you have a small pot, is it being eroded by fees and charges.
You are probably invested in a default fund, target date fund, lifestyle fund based on your age and selected date of retirement.
So as you get near to retirement the pot will become less riskier and held within so-called safer assets.
But you can if you wish, select your own funds, if you comfortable going down this route.
But most people have never made an investment decision in their lives.
So make a conscious decision to get actively involved within your pension plan.
Nobody should care more about it than you.
Could I consolidate my pots ?
If you have numerous pensions across several old employers or pension providers.
It may be worthwhile to consolidate them so transfer them to either simplify the admin. Or save paying multiple level of fees across numerous plans.
Ask the following questions !
- Will they let me – no reason why not
- Do I lose any special features or legacy benefits.
- Are there any fees, charges or exit fees.
- How long will it take – could be done in a few weeks.
Your pension should be written in trust and fully protected. If you are happy with them that’s great, but review them. You don’t have to stay with your existing provider.
You can transfer a pension at and age, but you can’t access until age 55, current MPA.
See blog post on consolidating: https://moneyminted.co.uk/how-to-consolidate-your-pensions
The years just ahead of upcoming retirement:
Create a retirement budget or spending plan:
Create a simple spreadsheet to cover income, expenses, etc.
It will help you massively to get an idea of what income you need in retirement.
List your essentials monthly into 3 groups
- bills: gas / Electricity / water / council tax / insurance / food
- wants: clothing / broadband / car / travel / subscriptions
- fun: holidays / social / eating out / leisure and hobbies / entertainment
You should see pattern of where your money is going over a period of time.
Most people have never done a budget in their lives and it may feel uncomfortable. But the figures will surprise you.
Then make changes to suit your needs, which items do you really need.
Are you wasting lots of money and you could cut back on certain areas to give you a better lifestyle in your later years.
Remember that you will spend more in the earlier years of your retirement, than the late years,
As you could become less mobile and take less holidays abroad.
Most pension providers will have simple pension calculators and budget planners tools online to help you.
So if you don’t want to create one yourself, take advantage of what’s on offer that’s free.
Work out your expected pension income:
You could have numerous different pension plans possibly DB and DC. As you have moved jobs during your career.
Years ago, people had jobs for life, but the working landscape has changed dramatically in recent years.
So see the bigger picture. I personally have deferred DB pension due at 65 from old employer. I have now active DC pension with recent employer. Plus my SIPP where I have consolidated numerous small DC pots together for ease.
So look at the illustrations across your pensions, including the state pension to get an idea of what your income in retirement may look like at a specific age.
If you are married or have a partner, consider what pensions and income sources they have.
They could have numerous pensions plans across different providers also.
It may be that you are in a good position collectively, but you have lots of higgledy-piggledy pots scattered across lots of pension providers.
They should provide you with annual benefit statements to give projections for what pot is worth now. Also, for later years at specific age, i.e 60 or 65 os state pension age.
Eliminate debts / mortgage:
Hopefully by the time you have reached retirement age you are debt free.
Most peoples biggest expense is their monthly mortgage repayment amount.
So if you are mortgage free your expenses in retirement should be considerably lower.
It would be a different scenario, if you are renting, as that figure may increase each year by the landlord.
Plus you are at the mercy of 3rd party controlling those housing costs.
However most people should be debt free in later years, unless you may upgrade your car or do home improvements, or have a lavish holiday.
But these expenses are normally subject to your salary or income in payment. Based upon affordability by the appropriate lender.
So try and eliminate any debt ahead of actually retiring. It will put you in a much better financial scenario.
Could you boost it by other ways !
Could you improve your retirement by working on a part time basis.
Doing an activity that you enjoy, which have been put off or deferred whilst working full time.
Could you use any additional funds or savings that you have built up.
Such as ISA / bank account / fixed bonds /premium bonds etc. to fund your retirement as a top-up. To improve your lifestyle in the earlier years.
Or could you use those funds to bridge income gap before pensions are due at specific age or default age, or when the state pension comes into payment.
What age do you actually retire ?
At present in the UK, the minimum pension age is 55, although this will soon rise to age 57 in April 2028.
So anyone born between April 1971 to April 1973, could be affected.
Unless you have protect date or ill-health condition.
What about financial advice !
At present there is no legal requirement to use a Financial Adviser when dealing with pensions. Unless you have a DB pot with cash equivalent transfer value (CETV) over £ 30,000 and you move that pension fromDB to DC format.
Or you have an old private pension with GAR or special features attached and you move it elsewhere, or cash it in completely.
You can choose to use a financial adviser (IFA) to help you and you can find one via the https://www.fca.org.uk/ website.
But check reviews, testimonials, fees and charges, network they use etc. Or ask friends if they can recommend somebody approved and authorised.
Then compare 2 or 3 in your local area, do you get a feel for them. What products and services do they offer.
It could be worthwhile paying extra for financial advice if you feel they can make better investment decisions for you.
Or if you are unhappy and comfortable making those investments decisions yourself.
You use get a free initial consultation with them upfront of doing any business with them. Which could put you at ease, or remove any investment fears that you have.
But remember nobody should care about your money and investments except you.
It maybe that you use an adviser for overall picture such a life insurance, income protection, obtaining a mortgage, or estate planning.
How do I claim my pensions ?
Once you pass the minimum pension age, you have to normally buy a product with a defined contribution pension.
So you could buy an annuity – to give some guaranteed income for lifetime or fixed term period
You could do it on your terms – put it in drawdown. So you access on your terms until the pot is empty.
A series of lump sums (UFPLS), so on each withdrawal 25% is tax-free and 75% is taxable income.
You could cash it in completely, so 1st 25% is tax-free and the rest is then taxable and added to other income received in that tax year.
Check out my blog post for greater information:
https://moneyminted.co.uk/what-is-an-annuity
https://moneyminted.co.uk/what-is-flexible-retirement-income-pension-drawdown
https://moneyminted.co.uk/how-to-access-your-pension-by-a-number-of-lump-sums
What about my state pension !
At present the state pension is set at age 66, although this will soon increase to age 67 from April 2028,
It is currently £ 241.30 per annum , so roughly £ 12,548 per annum.
Although it should increase every year with something called the triple lock.
See blog post for greater information: https://moneyminted.co.uk/what-is-the-triple-lock
Your state pension is completely separate from your other pensions either DB and DC.
It is based on 35 years NI contributions, and the date of entitlement is set by the government linked to your date of birth.
It is usually paid every 4 weeks, but in the 1st moth of payment, you will receive pro-rota payment.
The state pension is currently paid gross and non-taxable as it is below the current tax-free personal allowance.
But it would be added to other income received in the tax year and that income would be taxed accordingly.
In future years you pension income is normally taxed at source by your pension provider.
But do you you fit in the basic rate, higher rate tax brackets.
So look at gov.uk for more information on the tax implications.
As the current tax brackets are frozen until 2031.
Are there any recommended tools to help me !
In recent years the Pensions and Lifetime savings association (PLSA) did provide annual surveys to give indication of expected income levels required to attain a minimum, moderate, comfortable retirement. This has recently been rebranded as Pensions UK http://www.pensionsuk.org.uk
Two-people household – per person split)
- Comfortable: £ 31,500 net income
- Moderate: £ 22,700 net income
- Minimum: £ 11,250 net annum
Plus annual state pension to be added on top.
Single person:
- Comfortable: £ 45,400 net income
- Moderate; £ 32,700 net income
- Minimum: £ 13,900
Again with state pension added on top.
These figures will vary dependent on your own spending habits and patterns.
But it’s a starting point and the research is normally updated annually.
Also be aware that inflation will apply, so these figures will increase for future years.
Remember:
If you found this blog post useful and informative check out my other posts on savings, investing, pensions and investment book I recommend on https://moneyminted.co.uk
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