Pension Planning: Will you be ready for retirement?
Many people’s financial objectives include being able to fund a comfortable retirement. In spite of this, many savers spend more time planning their holidays than their retirement! Whilst pension planning may be daunting to think about, it is something that should be considered sooner, rather than later.
Matthew Bromley, Chartered Financial Planner at Cowgills Wealth explains some key things to consider when assessing whether your finances are where they should be in order to meet your retirement aspirations.
There is no doubt that the savings and investments process is complicated so it is important to make sure that you have the right people in place to help you plan for your retirement – a professional wealth manager is essential to help set your plan in motion.
What are the key considerations for most people?
Everyone’s circumstances are different, but key considerations for most people when they think about retiring will come down to factors such as whether they are renting, paying a mortgage, have any debt, plan to keep working, and how much money they have saved in pensions and other investments.
It’s also important to remember that your life changes when you retire – and so does the way you spend your money. The increases in the cost of living with inflation are another important consideration. While the State Pension increases with inflation (pensions for next year will be determined by the consumer price index rate of inflation, or 2.5%, whichever is higher), income from your pension might not, depending on how you decide to take your money.
Why should I start saving for my pension early?
Ideally you should start saving for your pension early on in your working life, even though at that stage it may be difficult to predict what your needs will be when you retire. In an ideal world, you should aim to put away as much as you can afford, but don’t panic if it’s not as much as you’d like to start with. It can be better to save small amounts that have a long time to grow in value.
As your income increases, you will possibly be able to increase how much you put away towards your pension.
If you’ve started to save later in your working life, you may have a better idea of what your retirement aspiration and circumstances are likely to be, which can make it easier to work out what level of income you’ll need for your retirement. The downside is, you’ll have less time to save, and the amount of money you’ll need to save may be higher.
Achieving financial freedom
Saving for retirement is essential if you want the financial freedom to enjoy your retirement years. Things you should consider include:
- Working out how much money you want each year in retirement
- Calculating how big your pension pot needs to be to provide you with that income
- Establishing how much you should be saving today in order to build the pension pot value you require
You’re perhaps less likely to have a mortgage and other big expenses at this stage in your life, so you may need a lot less than you do when you’re working. The ratio tends to go up for those on lower salaries, as you’d expect.
Know your number
Working out how big your pension pot needs to be in order to achieve the retirement income you want can be scary but needs to be done! A rule of thumb is to take the annual retirement income you’d like – let’s say it’s around £50,000 – and then multiply that by 20. So, in this example, to achieve a retirement income of £50,000, you’d need to build up a pension pot worth in the region of £1,000,000.
Your annual allowance
You can receive income tax relief on your own contributions to pension plans. You can contribute up to the greater of £3,600 or 100% of your salary.
Your pension contributions are limited by the pension annual allowance which is £40,000 each tax year for most people. Any contributions made by you and your employer count towards it, as does any money the government pays in pension tax relief. If the contributions exceed the standard annual allowance, then you may have to pay a tax charge based on the highest rate of Income Tax that you pay – it’s important to ensure that you are fully maximising your annual allowances.
Do you need to boost your future retirement income?
No matter where you are in the pension planning process, there are several things you can do to boost your future retirement income. Everyone’s retirement needs and goals are different, and planning for your retirement is just like any other kind of budgeting you have to do: it requires calculating some numbers, implementing a plan and continually reviewing it until you reach your goal.
If you’ve not already started to plan for your retirement, now is the time – our team of independent financial advisors can advise you on what you need to put in place now, in order to meet your retirement goals.
For more information about Pension planning contact Matthew Bromley – Chartered Financial Planner in Bolton on 01204 414243 or Matthew.Bromley@Cowgills.co.uk.
The information was correct at time of publishing but may now be out of date.