Tips on Planning for Your Retirement

Written by Karen Bryan

It seems to me that the average person is pretty bamboozled by the complexity of pensions in the UK. This is borne out by the fact that recent research carried out amongst people aged 55-64 for the financial services company Legal and General  uncovered that:

  1. 53% of interviewees said that they had received either poor or no financial education.
  2. 33% of interviewees said that they didn’t understand annuities (where you use your pension pot to buy an income for life).
  3. 26% of interviewees said that they didn’t understand how personal pension plans can be accessed.

To help address this issue, Legal and General held a Google Hangout (video chat) in which a panel of experts answered questions on retirement and pensions, submitted via Twitter and Facebook.

Below are my tips on planning your retirement based on my research and personal experience.

Make the Most of the Free  Money on Offer

Basic rate tax payers receive £20 tax relief on any pension contributions on 100% of their earnings, up to a maximum of £40,000 a year. That means that if you pay £80 into a pension, the Government will add £20, so that your contribution becomes £100. Even non-earners can pay up to £2,880 a year, which will be topped up to £3,600 through tax relief.

Most employees are automatically enrolled into the National Employment Savings Trust  (NEST) workplace pension scheme. Under this scheme, employees contribute 4% of their wages, employers contribute 3% and tax relief makes up another 1%.

Therefore, for employees the amount which you pay into your pension, could be doubled through the combination of employer contributions and tax relief.

As I’m self-employed, there were only my own contributions, topped up with tax relief, going into my pension pot.

Start Early

The younger you are when you start a pension, the more years you can pay in and the longer the pension pot has to grow in value with compound interest.

young woman holding £20 notes

I only started paying into a personal pension, when I was in my late 30s, I wish I’d started much earlier.

Pay In As Much As You Can Afford

There are always reasons not to pay into a pension e.g. not earning enough and it’s decades until you retire. But if you don’t pay in enough, your retirement is likely to be pretty frugal if it’s funded mainly by the State Pension.

Again, I wish that I’d paid into more to my pension. But, at the time, it already felt that I was paying in a large proportion of my net income into a pension, which I couldn’t access until I was 55.

Aim to Qualify for a Full State Pension

From April 2016, you’ll need to have 35 years of National Insurance contributions or credits to be eligible to receive a full State Pension, an increase from the current 30 years. You can pay voluntary contributions to make up for lost years.

I was caught up in the change. I thought that by my 55th birthday last year that I’d have paid the required 30 years of National Insurance.

Keep an Eye on Fees and Charges

Personal pensions can have an array of fees and charges. which can seriously erode the value of your pension pot. There is now a 0.75% charge cap on default funds in NEST pensions.

I was paying 0.8% annual fee on my stakeholder pension, slightly below the 1% cap allowed on stakeholder pension taken out before 1 April 2005.

Arrange an Appointment with Pension Wise

If you’re aged 55+, you can receive a free face-to-face or phone session for pension guidance through Pension Wise. It’s advisable to do some preparation before your session such as getting a State Pension Forecast, checking the value of any existing workplace or personal pensions and thinking about the minimum income you’ll need during retirement. It’s important to realise that Pension Wise can only signpost your options, not provide you with recommendations.

Read Up and Get Personalised Advice on Pensions

It’s in your own best interests to try to understand as much as possible about pensions. It’s your life and your money.

If you’re in a defined benefit pension scheme, such as final salary or career average, then you will be able to work out what pension payment to expect based on years of service and pay.

You need to be aware that personal pensions (which includes NEST) don’t have any guarantees of the pension income that you’ll receive when you retire. It depends on the value of the funds in which your pension pot is invested, which can to go up and down.

From the age of 55, you now have these options for your personal pension pot:

  1. Buy an annuity, giving you a guaranteed income for life.
  2. Take the whole pension pot as cash. The first 25% can be taken as tax-free lump sum, the remaining 75% is taxable.
  3. Keep the pension pot invested, in the hope of further growth, and use income drawdown to withdraw cash on a regular and/or flexible basis. You can either take the 25% tax-free lump sum before moving your pot into income drawdown or receive 25% of each income drawdown payment tax-free.

You can go for a mix of options e.g. use half  your pension pot to buy an annuity and the other half for income drawdown.

I did a lot of reading in the year before my 55th birthday, as my plan (which I carried through) was to buy an annuity as soon as I was 55. This was partly as being self-employed, I don’t have a guaranteed income and I wanted to be under less pressure to earn money.

I also consulted a online independent financial adviser (IFA). The IFA was able to draw up several options for me. He reckoned that there was the potential to generate more income by going into an income drawdown plan, but I wanted the guaranteed income that only an annuity can offer. I didn’t want to have to keep monitoring my pension pot and wondering how much income to take every year.

Planning for Your Retirement Podcast

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