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How to start planning for retirement (UK)

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    Contrary to belief, retirement doesn’t have to be hard; in fact, with the right planning and approach, it can be an exciting experience. However, it is often oversimplified.

    Retirement planning is a complex process with many moving parts like state pensions, pension rules, and it’s likely that you will need to adjust your plans over time to accommodate life events and unforeseen circumstances. If you’re wondering how to start planning for retirement in the UK we’ve compiled this guide to help

    Of course, there’s no substitute for tailored retirement planning from a qualified financial advisor, but if you’re not quite ready to commit to your financial future just yet, there are some key steps you can take to put yourself in as strong a position as possible: read on to find out what there are…

    The basic steps of retirement planning 

    As I’ve learned in my 20 plus years of being a financial advisor, retirement planning, with all its moving parts can be complex. But the biggest issue I see is people thinking that retirement planning and pension planning is just about where you invest your money.

    Retirement planning should include an investment plan, but there are some basic steps of retirement planning you’ll need to take before you get to that part. These are the essential planning steps that often get missed…

    Here at 2020 Financial, we break those steps down into:

    • Setting a retirement goal
    • Assessing your current financial standing 
    • Deciding how much money you’ll need in retirement
    • Starting to save enough to provide that type of retirement

    Of course, there is a lot that goes into each of these steps – but, there are ways to remove the stress entirely. It’s never too late to start planning for retirement; read on for our in-depth guide.

    How can I start planning for my retirement?

    Research suggests that if you want to maximise your wealth in retirement the savviest way to start planning for your retirement would be to get yourself a financial advisor. The next best advice is to start planning your retirement as early as possible. If you’re wondering where to start with retirement planning follow these simple steps:

    1. Set a retirement age.

    First thing’s first; if you want to start planning for your retirement, then you need to set your retirement age.

    UK Pension rules mean that you can now access your private pension from age 55 but you won’t receive your state pension until you reach state pension age.

    Since the state pension age keeps moving, if you want to take charge of your own retirement plans it makes sense to set your own retirement age.

    While putting a date on your retirement plans may seem like a simple task, it is essential for keeping your retirement plans on track. 

    Despite many of us wistfully dreaming about our golden years, the fact is that too often those dreams never turn into a concrete plan. If you fail to prepare a retirement plan, then you prepare to fail. Afterall, how can you know that you are saving enough if you don’t have a clue when you actually want to retire?

    On the flip side, some people will have set their retirement date when they were in their 20s or 30s, and a great deal will have changed since then; this will likely include their State Pension age and maybe even their career plans. Your plans need to be fluid and responsive; something you return to regularly.

    Setting your retirement date may seem like a ‘finger-in-the-air’ guess when you’re younger, but the date that you set for retirement on a pension plan matters since it will often dictate how your money is being invested and the communications you receive as you get nearer to that date, not to mention your own saving behaviours. Remember, the earlier you plan to retire, the more money you will need to save in a shorter amount of time. Plus, you have to take into account the wait for your State Pension (if you are due to receive it at all). Don’t just choose the dream date; make sure that it’s realistic.

    1. Get a state pension estimate.

    If you’re planning your retirement in the UK It’s important to find out how much of the State Pension you are entitled to; if any at all. Alongside this, you want to figure out when you are due your pension, and how this will contribute to your overall retirement fund.

    The full new State Pension is £179.60 per week with more available if you have over a certain amount of Additional State Pension or if you defer taking your State Pension. Needless to say, this isn’t going to buy you a holiday in the Bahamas, but it’s nothing to be sniffed at. You can visit the gov.uk website to find out:

    • How much State Pension you could get
    • When you can get it
    • How to increase it, if you can

    You can then factor this amount into your retirement planning and build a more realistic idea of your trajectory.

    1. Gather details of any personal pension pots.

    Let’s face it; a lot of us have pension pots, savings and investments lined up here, there and everywhere. An important part of your retirement planning is bringing these all together. 

    Take a look at any potential pension pots, including:

    • Self Invested Personal Pension (SIPP)
    • Employer pensions
    • Defined benefit pension
    • Saving accounts
    • Investments

    You need to gather all of the details of these pots together and, ideally, put them forward to a financial advisor who can then tell you whether or not you are using your finances to their full advantage.

    You can find old pension pots for free using the Government pension tracing website. It might take a few phone calls or letters but it’s best to do this than to use expensive pension tracing services.

    1. Estimate how much money you’ll need in retirement.

    You’ve got your retirement age. You’ve gathered your pension pot details. You know how much of your state pension you’re entitled to. Now you need to estimate how much you’ll need in retirement.

    If you simply want to maintain the same standard of living during your retirement, you could start off by using the target replacement rate. This calculates how much you would need to save if you plan to retire with a very similar lifestyle, minus any mortgage or rent repayments and commutes. Typically, this tends to be around 50% to two-thirds of your pre-retirement income. However, it is purely a ballpark figure, and if you want to live a more luxurious life during your retirement then you need to figure out a bespoke budget.

    One way to start this process is by using a retirement planning calculator. This will take you through the different elements that you may (or may not) want to include in your retirement, such as:

    • Holidays
    • Owning a dog
    • Gym membership
    • Home renovations
    • Meals out
    • Sport memberships
    • Cars
    • Shopping

    It will then pull together an approximate figure that you can aim for in your savings. You can also stack this up against your expectations for retirement: do you want a basic, comfortable or luxury retirement? 

    Most people would agree that a ‘good retirement income’ is one that offers them security, that allows them to participate in the activities they want to do and provides them with a comfortable enough standard of living to be happy.

    Research by the National Employer’s Savings Trust (Nest) in 2014 stated that £15,000 was the income level where retirees begin to feel comfortable and more secure. Adjusted for inflation that’s about £16,350 in today’s money. The 2014 report stated that reported levels of well-being rise significantly once retirees earn between £15,000 and £20,000 but there is no happiness benefit above £40,000 a year. 

    Retirement-income-estimates-2019

    Royal London put their ‘comfortable’ retirement income at £17,500 a year. With the current UK state pension providing just over £8500 a year, according to this, the average person retiring at state pension age will need to add over £9,000 a year to top up their state pension to a comfortable income level.

    RELATED: WHAT IS A GOOD RETIREMENT INCOME?

    1. Speak to a financial advisor.

    The increased choice and flexibility for accessing your pension in the UK has brought with it added responsibility and risk. Many people are now also questioning whether they need a financial adviser for their pension. A study of those with pensions in flexi-access drawdown, carried out by insurance giant Zurich, found that​​​​​​​ a large percentage were unprepared and uneducated about the risks they were taking on. Despite that many were choosing to go it alone without consulting a financial advisor. 

    The fact is that speaking to a financial advisor immediately puts you in a better position. They are not there to give you a handful of advice and then disappear into the ether. They will help you create a full financial plan, ensure that your money is working hard enough and that you are aligned and on track to hit your goals. 

    An independent financial advisor for your pension planning can help you:

    • Manage your risk
    • Keep you on track with your goals
    • Choose diversified investments (location and industry-based)
    • Avoid common investor biases and expensive mistakes
    • Access your money tax-efficiently
    • Understand and evaluate the costs involved with different investment options
    • Understand how to manage funds flexibly over the long-term
    • Regularly review and refine your investments
    • Keep you up to date with pension rule changes that might affect you
    • Implement a Plan B, C or D

    They will also keep a close eye on your investments and consider whether or not you are invested appropriately and if said investments are performing as they should: let’s face it, no one wants a high charging, low performing zombie fund. Plus, they will make sure you are planning for the unexpected.

    While a vast majority of people have life insurance in place, frequently critical illness policies sit by the wayside. This is a huge mistake as if you ever find yourself in a position where you can no longer work and – as a result – your pension pot starts to gather dust, you could see your retirement plans float straight out of the window.

    Fundamentally, although a financial advisor does come with a cost attached, they will save (and make!) you money in the long run. In fact, people that work with financial advisors are also likely to save more and even those deemed to be ‘just getting by’ are more likely to be significantly wealthier (to the average tune of about £40K) over a 10 year period when they work with a financial advisor. And you can’t argue with those numbers.

    Retirement planning calculators

    If this all still feels too far away, then why not use a retirement calculator to gather that initial estimate?

    Retirement calculators can tell you how much you might need in retirement, how much you should be saving and how long your pension pot could last

    Retirement planning calculators are a great starting point, but you need to take them with a pinch of salt. They’re a jumping-off point, rather than a concrete plan for you to rely on entirely. There are many aspects that they don’t take into account, and it can never fully be tailored to your unique situation.

    Saying that, if you’re still in the early days of your pension planning and retirement saving, they’re a brilliant way to tell you whether or not you are on the right track. 

    Explore all of our FREE retirement planning calculators here.

    6. START SAVING FOR RETIREMENT

    Once you know how much you need to retire, you’ve got your state pension estimate and gathered details of your other pension pots, it’s time to start saving so that you can plug any gaps between what you need in retirement and what you have.

    This may sound like a simple step, but it’s worth going into it with a plan of attack. When it comes to saving for retirement, the best place to start (if you’re an employee) is your workplace pension: this is an incredibly easy way to boost your own pension savings with your employer contributions. It’s useful to note that you may have to commit to a minimum amount of savings to maximise your employer contributions, but it’s worth it in the long run. 

    If you’re self-employed or a company director then your business can pay into your pension on your behalf and you won’t pay tax on those contributions. We’ve written a full guide on pension saving for self-employed people, which you can read here.

    Planning for retirement with a pension 

    Pensions are THE most tax-efficient way to save for your retirement. The benefits are enormous and if you want to ensure your golden years free from financial stress, properly planning for your retirement with a pension is the ultimate way to go.

    First of all, pensions enable you to receive free money from the government in the form of pension tax relief. So, depending on your rate of tax, the government will top up whatever you put into your pension, as shown in the graph below.

    pension tax relief_how the government tops up your pension depending on your tax bracket

    In addition, you can access even more money through employer pension contributions. This is only applicable if you’re an employee, unsurprisingly. The good news is that with auto-enrolment you’ll automatically be put into a workplace pension scheme, and so you’ll start reaping these benefits straight away.

    On the other hand, if you’re self-employed or a business director, your business can actually pay your pension contributions on your behalf, meaning you won’t need to pay any tax on them. This can work out more financially beneficial than taking the money out as a salary; it’s a great way to give yourself an automatic pay rise.

    Whatever your professional situation, there is no capital gains tax on the money made within a pension and it isn’t liable for inheritance tax. All of this together makes it the most tax-efficient wrapper possible for your hard-earned investments.

    You can access your private pension from the age of 55 (this is soon moving to 57) and the first 25% that you take out is tax-free – clearly, the benefits are major. However, if you still aren’t sure whether a pension is the right investment for you, you can get in touch with an independent financial advisor.

    Planning for retirement in your 20s

    If you are planning for retirement in your 20s then you are already in a brilliant position as it is NEVER too early to start saving for retirement. After all, the earlier you start saving, the less financial pressure on your shoulders.

    By planning for retirement in your 20s, you will have more wiggle room later down the line when it comes to meeting your goals. Time is on your side, and as such you have the added bonus of flexibility on the route you take to hit those retirement goals. Similarly, you have more time to save, and so you can put less aside every month to reach the same goal. The amount can be barely noticeable, and certainly less painful than for people who start saving later in life.

    Early retirement planning is essential if you have plans to have children or take a career break, especially as a woman. There is a hefty difference between the average male and female pension: for men, it is £40,084, compared to £24,445 for females – a difference of just under 40% or £16,639.

    A 2020 report by Scottish widows suggests that the difference in pension pot value between men and women could equate to £100,000 over a 44-year career.

    Source: Scottish Widows

    This means that, typically, women may need to save for longer if they want to reach a certain level of pension investment; however, a financial advisor will build this into your financial planning.

    We strongly recommend that you consider income protection and critical insurance cover to plug any potential gaps in your retirement savings if you can’t work, and also that you take the time to get on top of your investment charges: over time, these can seriously erode your investment and so it’s vital that you check that you aren’t paying too much and that your investments are actually performing to the best of their ability (and if not, where – if necessary- you should move your investments). 

    Finally, be careful to steer clear of all pension, forex and cryptocurrency scams. You are more likely to be targeted and fall prey to ‘get rich quick’ FOREX and Cryptocurrency scams in your 20s and 30s, especially as they use influencers to promote their platforms and investments. You can protect your long-term financial future by avoiding these scammers. Even legitimate FOREX schemes are high risk and most of the ones you’ll find online are scam sites.  In addition, Cryptocurrency and Forex may not be subject to the same protection laws as regulated investments – so avoid, avoid, avoid at ALL costs.

    And, of course, remember that the free money from the government is there to be taken – don’t turn it down as it will have a hugely beneficial effect on your final pension pot.

    Planning for retirement at 30

    If you are planning for retirement in your 30s, you will have to work a little harder than those who started in their 20s. Saying that, you are still in a great position to build a pension pot that delivers the financial future of your dreams. 

    As a general starting point, a Fidelity report suggests that if you want to be on track with your retirement planning you should have saved 1 x your salary by the time you’re 30. If not, then you will need to go back to your pension planning and adjust accordingly. This may mean exploring alternative forms of pension investment and/or increasing your contributions. 

    It is important to note that at this point, auto-enrolment might not be enough for a comfortable retirement and PSLA suggests that you should be saving a minimum of 12% of your salary. This blog shows what a 1% increase in savings would equate to overtime; however, keep in mind that it doesn’t take into account additional tax relief or employer contributions. The best thing you can do to make sure you are on the right track is to speak to a financial adviser who can work with you to create a bespoke pension plan and retirement investment forecast.

    We also advise that you do not rely on your spouse’s pension pot for your retirement; if you divorce, there is a high probability that you won’t get your fair share of the pension pot. It is therefore paramount that you build a pension pot irrespective of your partner: one that you know will support your lifestyle whatever the circumstances.

    Speaking of changing circumstances, consider income protection and critical insurance cover to plug any potential gaps in your retirement savings if for any reason you can’t work. Also be aware of the copious pension scams circulating. These ‘get rich quick’ currency scams are very prevalent in your 20s and 30s, and Cryptocurrency and Forex scams, in particular, may not be subject to the same protection laws as regulated investments. 

    Planning for retirement at 40

    For those planning for their retirement at 40, there are some additional factors that you will need to take into account. First of all, the amount that you should already have saved.

    A Fidelity report suggests that if you want to be on track with your retirement planning you should have saved 3 x your salary by the time you’re 40. This isn’t an amount to be sniffed at, and if you are there yet then you will need to seriously increase your pension contributions.

    However, before you do that, you need to decide on the type of retirement you want to have: for example, basic, comfortable or luxury. If you’re hoping to enjoy a comfortable retirement, experts estimate you’ll need between £15,000 to £40,000 a year (or if you’re using Target Replacement Rate as a measure, you’ll need between a half and two-thirds of your pre-retirement annual income every year). So, once you know your ideal type of retirement – taking into account all the current and additional expenses that will move with you into your golden years – you can start putting some meat on the bones of your retirement plan. 

    You will also need to think about WHEN you want to retire and any major financial considerations that may impact that date: for example, your children’s school or university fees, paying off your mortgage, helping get your kids onto the property ladder or buying a second home. This all must be accounted for in your pension planning and financial forecasting.

    RELATED: WHY YOU NEED TO SET A RETIREMENT DATE

    We advise all of our clients to consider income protection and critical insurance cover to plug any potential gaps in your retirement savings if (for any reason) you can’t work. It is also important that you do not rely on your spouse’s pension pot for your retirement; if you divorce, there is a high chance that you won’t get your fair share of the pension pot. It is therefore crucial that you build your own pension pot irrespective of your partner: one that will support you no matter what.

    While you are looking at the different ways to protect yourself, please also avoid pensions scams at all costs. There are countless scams floating around, including Cryptocurrency and Forex scams, and they may not be subject to the same protection laws as regulated investments. Do not fall prey to them; look after your investments, and they will look after you.

    This is all something that a financial advisor can support you with. They will also check that your investments are working for you and, if not, suggest alternatives or slight tweaks that you could make to get the most out of your money.

    Planning for retirement at 50

    When planning for retirement at 50, the first step is to check in on your retirement plans; have they changed? You may now want to retire earlier or later than initially planned, or perhaps need more or less money than you originally thought. If so, go back to the drawing board and create a new plan that accommodates your changing needs.

    This is also a great time to review your multiple pension pots; for example, any old pensions that are stuck in zombie funds, aka old funds that charge extortionate fees with little to no performance. You may want to speak to a financial advisor to see whether consolidating all of your old pension pots is in your best interest.

    If you are only now starting your retirement planning, it goes without saying that you no longer have quite as much time (or compound interest) on your side. You, therefore, need to be prepared to save a significant amount of money every month to meet your goals. But, try not to panic. While this may feel like a mammoth task, there are often areas where you could save, adjust your priorities and make use of certain opportunities. Plus, as you are closer to retirement age, you have the benefit of knowing more clearly what you might need in retirement; you can subsequently make more detailed plans, rather than arbitrary figures and ideas. Again, this is something that a financial advisor can provide tailored guidance on.

    Pension saving at age 20, 30, 40 and 50 - investing for retirement

    As part of your pension planning, we encourage you to settle as many debts as possible before you retire: for example, mortgage payments and the like. This will minimise your outgoings come retirement, meaning a lower pension pot will be needed.

    You will also need to check your State Pension estimate: you can do that for free here. You must have built up enough qualifying years of National Insurance contributions in order to receive the full state pension. Under these rules, you’ll usually need at least 10 qualifying years on your National Insurance record to get any State Pension.

    You’ll need 35 qualifying years to get the full new State Pension. Alternatively, you’ll receive a proportion of the new State Pension if you have between 10 and 35 qualifying years. Only full years count, so if you have had any gaps in your NI payments you may have fewer years than you expected. It is sometimes possible to top them up, but there’s a time limit attached: check early rather than leaving it to chance. The cost could be as little as a few hundred pounds.

    Your chosen retirement date is important, especially the closer you get to your retirement age as you want to avoid lifestyling if possible. Lifestyling is an investment strategy whereby your pension scheme looks at your age and adjusts your investments accordingly. The closer you get to retirement, the lower-risk investments that they may move you across to. This can include switching your pension savings into another fund, or funds that typically have a lower risk profile. 

    The idea is that this better aligns your pension savings with your plans for using them, while reducing the risk factor of your pension savings the closer you get to retirement. This can be a good thing as it minimises the risk of your pension value falling just before you access it; however, it can also minimise your returns and may not take into account how you personally plan to access your pension. You can speak to your pension scheme administrator and update them on your plans if this is something you want to avoid.

    Don’t be tempted to splash all of your tax-free cash at age 55 – while it may feel VERY tempting, the impact on your long-term retirement plans can be substantial. Not only does this have tax implications, it could actually lead to you running out of money in retirement. Protect your financial future in any way possible.

    Another thing that can have a massive impact on the health of your pension pot is pension scams. Pension scams are hugely prevalent right now, including Cryptocurrency and Forex scams, and they may not be subject to the same protection laws as regulated investments. Avoid them at all costs and ensure your financial future is protected.

    RELATED: CAN I RETIRE AT 55 WITH £400K

    Planning for retirement at 60

    If you are planning your retirement at 60, you need to decide how you want to access your pension and what you need in retirement.

    While most people these days opt for a flexi-access drawdown pension, this isn’t the right choice for everyone. Alternatively, you might be more comfortable with an annuity that pays a guaranteed amount of money every month. However, these aren’t cheap and you may need to adjust your pension plan and financial forecasting to ensure it still leaves you with enough money in retirement.

    Ask yourself: how much do you need in retirement? Here you need to consider the lifestyle you want for your golden years… Is it a basic, comfortable or luxury one? Of course, what these levels mean is open to interpretation, but as a general rule experts estimate you’ll need between £15,000 to £40,000 a year (or if you’re using Target Replacement Rate as a measure, you’ll need between a half and two-thirds of your pre-retirement annual income every year) for a comfortable retirement. Have a think about what this means for you and whether or not your current savings match up. 

    how much you'll need in retirement to maintain your standard of living_target replacement rate

    As part of this, check in on how much you will receive on the State Pension: you can get an estimate for free here. Keep in mind that you must have built up enough qualifying years of National Insurance contributions in order to receive the full state pension. Under these rules, you’ll usually need at least 10 qualifying years on your National Insurance record to get any State Pension. You’ll need 35 qualifying years to get the full new State Pension. Alternatively, you’ll receive a proportion of the new State Pension if you have between 10 and 35 qualifying years. Only full years count, so if you have had any gaps in your NI payments you may have less years than you expected. It is sometimes possible to top them up, but there’s a time limit attached: check early rather than leaving it to chance. The cost could be as little as a few hundred pounds.

    In the meantime, consider whether or not your investments are appropriately invested according to your risk profile. This is the time to get the most out of your money, and there may well be better ways for you to invest. This can be a complicated process, and it’s something that a financial advisor – with their extensive industry knowledge – can help you with. A financial advisor can also provide guidance on consolidating your various pension pots if you plan to use drawdown, how to access your money in the most tax-efficient way possible and can help you build a long-term view of your retirement planning. This can include legacy planning as well.

    No matter what your situation, be extra vigilant around pension scams. It’s no exaggeration to say that these ‘get rich quick’ schemes are everywhere. This includes Cryptocurrency and Forex scams, both of which may not be subject to the same protection laws as regulated investments. 

    READ: How much do I need to retire at 60?

    When should I start planning my retirement

    If you’re wondering when is the right time to start planning your retirement, the answer is simple: as soon as possible!

    Einstein reportedly said that: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” And he isn’t wrong. The sooner you start saving for retirement, the bigger the potential of your pension pot. Yes, you have longer to contribute to it, but it also has a greater amount of time to grow. This gives you more wriggle room; even if you wanted to pause your contributions in your 40s (not that we recommend it!), your pension pot would still accumulate.

    Starting earlier also means that you can put aside less and still reach your retirement goal. But if you didn’t start saving in your twenties or thirties, fear not: now is better than never. Don’t put off planning your retirement through the fear that you’ve left it too late. If you’re 50 or over, you can ring Pension Wise and book a free, impartial advice consultation. While they won’t give you specific guidance, they will tell you the different options on the table so that you can move your pension planning forward.

    For tailored, specific and strategic advice, speak to an independent financial advisor. This is something we can help you with at 2020 Financial. We’re passionate about planning pensions, and ​​nothing makes us happier than seeing you reach your future goals in a way that doesn’t compromise your present.

    Need help planning your retirement? Get in contact with our retirement planning specialist today. 

    Posted in
    Simon Garber

    Simon Garber

    Simon Garber, DIP PFS, runs 2020 Financial Ltd. He's an Independent Financial Adviser and Pension Transfer Specialist with over 20 years of experience. He's FCA registered, a member of the Personal Finance Society and holds the coveted Gold Standard for Defined Benefit Pension Transfer Advice.

    He is the Managing Director of 2020 Financial Ltd, Financial Advisors specialising in Retirement Planning & Wealth Management, based in Southampton, Hampshire.

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