Too many of us don’t start thinking about retirement seriously until we get nearer the end of our working lives.
Planning for retirement
We all know that we should start planning for our retirement as early as possible, but let’s be truthful: Too many of us don’t start thinking about retirement seriously until we get nearer the end of our working lives.
So, if you are in your 50s, and it’s suddenly dawned on you that you need to pay more attention to your retirement savings, then what are the next steps? What issues should you be considering around pensions and retirement?
Spending even a little time with an adviser can prove beneficial. Even if you walk away from a meeting having learned nothing new, the peace of mind that comes with knowing you’re doing the right thing could prove invaluable.
It’s just as likely, though, that you’ll come away with a fresh perspective on how to maximise your chances of a comfortable retirement. An adviser will have many insights that a layman will not, no matter how good you are with your finances.
The first, basic step, he says, is to calculate what sort of income you need to sustain the lifestyle you want after you stop working. This can be tricky, as you might not know what you’ll need in the future, and it’s impossible to predict the exact impact of inflation, but an adviser will be able to outline the broad scenarios.
“Someone might be looking for a retirement income of £50,000 a year, and depending on what they are earning, that might not seem like a huge figure.
“But if you tell them they might need about £1m saved away in order to get £50,000 a year when they retire, that can slow them down a bit, because it’s a big figure to most people.”
Your pension fund will be charging you for the service it’s providing, but make sure you are not paying over the odds. The charges come out of your fund, and high charges can have a significant impact on the returns you receive.
Charges can manifest themselves in different ways, and that’s something an adviser can help you with. If you are paying over the odds under your current arrangement, an adviser can help you find a more competitive place to invest your money (although bear in mind that an adviser will have his or her own charges).
Max your pension contributions, if you can…
Turning 50 is a good time to check that your attitude to risk is being respected by your fund manager. With most people, the plan is to move investments into safer havens as retirement approaches.
As you get closer to the point when you want to get at your money, it makes general sense to dial down the risk.
If you hit a rough patch of two or three years of your investments not going well, that’s more significant as you approach the point when you’re going to want the money. When you’re younger, you’ve got more time for it to bounce back after a difficult period. When you’re approaching retirement, you want to be more careful with it.
Some employees have been stuck on the same contribution rates since they started work – perhaps at 5%. Raise your contributions significantly in the final years before your retirement, if you can afford to do so, to maximise your pension pot.
The ability to make huge annual contributions has also been cut over the years. For tax relief purposes, the maximum you can now put into a pension is 100% of your annual income or £40,000 a year, whichever is lower.
We used to have compressed funding, where a lot of people would put in huge amounts of money right at the end. Nowadays you can’t put those huge amounts in, so it’s even more important that you put in sensible amounts every year from a younger age.
You can backdate your allowance by three years, but any allowances you failed to utilise before then are lost.
This impacts very high earners the most, but it also means that people who might benefit from legacies when they are in their 50s, for example, can’t push it all into a pension.
In the old days, you could put £200,000, £300,000 or £400,000 a year into a pension towards the end to make up for what you hadn’t done in the past.
Today, you can go back three years but only to the tune of £40,000 a year (and even then you only receive tax relief up to 100% of your earned income in the year you make the contribution), so people of a younger age need to pay into things earlier.
Paying in earlier also gives more time for your money to grow.
Try to clear your debt
This is also the age where you should start thinking about clearing any debt you have accumulated.
Most people in their 20s, 30s and 40s have got debts but when you get to the point of stopping work, you don’t want debt. If you clear it along the way, you won’t need as much income in retirement than you would if you still have debt to clear.