How to Plan for your Retirement

Short of winning the lottery or inheriting a small fortune, there are two financial avenues when it comes to ensuring a comfortable retirement. The first is to save or invest your hard earned money and the second is through a state or workplace pension scheme. Whilst pensions are technically a form of saving, they are quite distinct in how they work, so I have separated them.

In this article I want to look at how best to plan for your retirement and what kind of steps you can take to ensure a contented old age, even when you’re in your twenties. Let’s start though by exploring these two main financial avenues to a healthy income in retirement.

Savings and Investments

There are a number of savings and investments that you can plough your hard earned money into over the course of your working lifetime. These range from the no or low risk, like ISAs and lifetime ISAs to higher risk options like Enterprise investment scheme (EIS) and venture capital trusts (VCTs).

There are also a number of alternative areas you can invest money into for the long term from stocks and shares to investing in art or wine. The relative risks associated with any investment vehicle can vary massively, so it pays to diversify your portfolio to protect against the risk of one avenue failing.

If you are looking to invest in medium to high risk schemes, it also pays to get an independent financial and wealth management advice on how best to make the money you have work for you.

Pensions

Pensions are what most people rely on when it comes to retirement. If you’ve been paying National Insurance contributions during your working life you’ll qualify for a State Pension. If you reach State Pension age on or after 6th April 2016 and have at least 10 qualifying years of NI contributions, then you will receive the new State Pension which is £159.55 per week.

As you might imagine looking at this somewhat paltry sum, a State Pension alone is not a good enough fall-back if you are planning a comfortable retirement (and who of us aren’t?). Under changes to pensions, you and your employer are obliged to pay a minimum towards your workplace pension. This is set to increase until April 2019. How this is worked out is based on your ‘qualifying earnings’. More details can be found on the pension advisory services website.

In 2015 the UK government made changes to the pension scheme that allows the 4.5 million people with a Defined Contributions scheme to access their pension pot from the age of 55. The first 25% of any withdrawal is tax free but anything over that will incur income tax. This newfound flexibility on pension drawdown has had an effect on the purchasing of annuities (which haven’t been compulsory since 2011), with many people deciding to manage their own pension pot when they reach retirement or drawing on their pension well before retirement age.

Whilst annuities are a form of insurance that could mean the annuity provider keeping any remaining funds in your pension pot, should you die before it’s exhausted, there is a potentially greater risk in drawing down on your own pension. As with any other savings or investments relating to your retirement, it’s important to get independent financial advice before doing so.

Top Tips for a more Comfortable Retirement

Top Tips for a more Comfortable Retirement

20s and 30s

  • Clear your debt:It’s not uncommon to have a lot of debt when you’re in your twenties and early thirties. This could be in the form of student loan debt or credit card debt. The sooner you can get out of debt, then the sooner you can start diverting a proportion of your income into savings.
  • Open an ISA: There are so many benefits to opening an ISA or lifetime ISA at an early age. Whilst your earnings are likely to be low and your debts high at the start of your career, if you are able to save then reaping the tax free benefits of an ISA are well worth it.
  • Join a pension scheme: We’ve talked extensively already about workplace pensions but the earlier you can join one the more you will start putting away for retirement. If you are self-employed, or want to supplement your workplace pension, then you could consider a personal pension.
  • Assess your financial commitments: Your financial commitments (family, mortgage, etc) need to be balanced out with the potential to start making long term investments. It’s important to clear debt but if you have expendable income then now might be the time to invest it

40s and 50s

  • Assess the size of your pension pot: It pays to start taking a more active interest in your pension at this age. You should know how much is in your pension pot and how much you need to save to have the kind of retirement you want. This will also mean considering when you want to retire (ok we’d all like to retire at 40, but be realistic).
  • Consider opening a SIPP: We’ve already mentioned personal pensions but you might want to look into opening a self-invested personal pension (SIPP) during your 40s. SIPPs give you far greater control over where your contributions are invested and allow you to keep your money invested after you retire, drawing down a regular income.

60 years and over

  • Pay off remaining debts: As you approach retirement it is important to clear any outstanding debts you have. If you’ve planned well then the only debt you are likely to have in your 60s will be your mortgage. If you have extra income then it could be a good idea paying this off so you own your home. If you then decide to downsize, then this could free up a significant chunk of money.
  • Consider working later: You might feel in your 60s that you want to work later in life. This could be to pay more into your pension, or simply because you don’t feel ready to retire. The later you work then the more comfortable your retirement is likely to be.

Speak to a professional

As with all financial matters, seeking the advice of a professional helps you to make the right choices for right reasons and gives you peace of mind that you’re on the right path. Plummer Parsons Wealth Management team have many years experience in pensions and investments and can help you secure a comfortable retirement.