Retirement planning is essential for being as financially comfortable as possible during later life. It doesn’t matter whether you’re 20 or 50, everyone should be thinking about how to prepare for retirement. It’s not just a matter of saving as much money as possible, it’s about being financially savvy and in the know! As the saying goes, if you fail to prepare, you prepare to fail.
So what can you do to keep track of your later life income?
25% tax-free cash
From the age of 55 it is possible to release up to 25% of your pension fund tax-free, and the remaining 75% will be subject to income tax. It is important to consider why you want to access your tax-free cash and when. The longer you leave your fund in the wrapper of a pension, the longer it will have to grow, so you could benefit from a greater tax-free amount.
The State Pension
Before reaching State Pension age you should check whether you qualify for the full basic State Pension. If you have made insufficient National Insurance contributions you will not qualify for the full amount, but thorough retirement planning could ensure that you don’t miss out. When you reach retirement age you do not have to start taking your State Pension; if your financial situation allows, you might choose to defer it. Deferring the State Pension will increase the amount of annual income you receive, currently by 10.4% for each year deferred, so this may be appealing. Take a look at our graph to find out how much more you could get.
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National Insurance contributions
When approaching retirement you can make voluntary payments towards National Insurance to top up your State Pension, and ensure that you are eligible to receive the full basic State Pension. In most cases you can make up for any gaps in National Insurance payments during the past six years. Currently, you must make a minimum of 30 years’ worth of National Insurance contributions to receive the full basic State Pension.
If you decide to use your pension fund to purchase an annuity make sure that you shop around for the best deal. Research conducted by the FCA found that 80% of people who simply accepted the annuity offer from their current provider could have secured a better deal on the open market. What’s more, there could be a difference in annuity income of up to 60% between a standard annuity and an enhanced annuity!
Get a pension wealth check!
When was the last time you checked how well your fund is performing?
If you cannot remember, now is the time to find out! It is important to regularly review the performance of your investments as they may not be performing as well as you think, or you may have a different attitude to risk than when you first set up your pension plan.
Retirement planning should begin earlier in life than it often does. In most cases saving smaller amounts of money over a longer period of time is more effective than saving larger amounts over a shorter period of time because compound interest has time to work its magic. Research conducted by the Money Advice Service indicates that:
If someone saves £200 per month for 20 years they’ll have around £75,000, but,
If someone saves £100 per month for 40 years they’ll have a pot size of around £123,000
You may have accumulated several pension pots over the years and might even have one that you’ve forgotten about. Consolidating them could make keeping track of your retirement savings much easier, and may make financial sense as you will no longer be paying a management fee for several different pots. You’ll also have a better understanding of how well your pension is performing and how much retirement income to expect.
Looking after your children
Many people want to leave their assets to their children when they die. Retirement planning is a key factor in providing an inheritance because your pension fund is held outside of your estate, so will be exempt from inheritance tax. However, it’s worth knowing that if you die aged 75 or over your beneficiaries could pay income tax. If you die before the age of 75 your beneficiaries will not pay any income tax on the inherited fund. So if you want to leave as much as possible to your loved ones your pension may be a good place to start.
Make the most of tax relief
Tax relief on pension contributions is a huge incentive for people to save. When saving money into a pension the income tax deducted from your earnings is returned, so every £80 that you put away is boosted to £100 when the basic rate of 20% tax relief is applied. The more money you put in the more you’ll get back from the government. This also applies to auto-enrolment whereby you, your employer and the government all contribute to your workplace pension.
Be in the know!
Make sure you have a clear understanding of what your retirement options are, as there are several different options available but they may not all be appropriate for you. Making ill-informed decisions could affect the amount of income you have for the rest of your life. It pays to be strategic with your pension savings and seek financial advice from a regulated adviser.
*In all cases the subject used was a 65-year-old male on a single life basis. A 3% escalation was used. For the enhanced annuity the subject was a smoker who had had a heart attack. A pension fund of £100,000 was used and in all cases 25% tax-free cash has been taken. Whole of market comparison performed 17 December 2014.
The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.