Retirement planning: how to approach it and succeed
Maybe you have a clear idea of retirement, or maybe you haven't thought about it yet. Whatever the case, there are steps you can take towards this life goal.
What is retirement? It’s that blissful state of no longer having to work, with time instead to travel, see friends and family or pursue the leisure activities you love.
But wait – images like these are possible only if you’ve actually planned and saved for it.
Wherever you might be on your journey toward retirement, but especially if you're just getting going, here are some things to think about.
How to plan for retirement?
Ask yourself what a good retirement looks like to you. Would you want to take early retirement and stop working at 55 or 60? Maybe you love working and you’ll only semi-retire, working part-time, setting up your own enterprise or volunteering instead of stopping work altogether.
Whatever you envision, work backwards from there to determine what you need to do now to make it achievable. There are lots of free online pension calculators that can help you. Have a look also at the Pensions and Lifetime Savings Association’s Retirement Living Standards: these outline different kinds of retirement lifestyles, including spending on clothes, transport, holidays and food, and how much you would need each year to afford them.
How will you fund your retirement?
Most people fund their retirement with a combination of the State Pension and one or more other types of pension, such as a workplace pension or a SIPP (Self-Invested Personal Pension). Some people may have other assets that also generate income, such as a rental property or an investment portfolio.
» COMPARE: SIPP providers
The State Pension
The full new State Pension is £185.15 a week in the 2022/23 tax year, or a little over £9,600 a year. To be eligible for this, you need to have paid 35 qualifying years of National Insurance contributions. You can check your record online on the government’s website and make extra payments to fill any gaps, such as if you’ve taken a career break for any reason, been self-employed or a low earner.
Sometimes you hear people who haven’t made any plans for their retirement, saying they’re not worried because they will just live on their State Pension. But bear in mind that the absolute minimum you need to live on to have a really basic retirement is £10,900 a year, according to PLSA’s Retirement Living Standards, so, by relying on what you’ll get from the state, you’re already leaving yourself more than £1,000 short.
And who knows what the provision will be by the time you come to retire, and at what age you’ll be able to get it? It’s a dangerous game to rely on the State Pension without saving anything yourself.
» MORE: All about the State Pension
Workplace pension schemes
Hopefully you will also be able to get an income from a private pension, most likely your workplace scheme. This pot of money gets invested in stock markets and other financial assets, and should grow over the years.
Following the introduction of auto-enrolment, anyone aged 22 or over and earning £10,000 or more will automatically be signed up to a workplace pension (unless they opt out).
If you are lucky enough to be in a so-called defined benefit scheme — if you’re in the civil service, or work for the NHS, the police or as a teacher, for example — your pension will pay a guaranteed income for life based on your earnings and the length of time you were in the job.
However, if you have a defined contribution pension, the final value of your scheme will be determined by the amount of money you paid in and the performance of your investments.
Take a lump sum
From the age of 55 (likely to rise to 57 by 2028), you can take out a lump sum (up to 25% of the pot tax-free) to spend, or take a regular income and keep the rest of the money invested so it can keep growing. However it makes sense to dip into your pension only once you stop working. As you get older you may consider an annuity, which in return for a lump sum pays a guaranteed income for life.
On average, we have six jobs in our lifetime (with millennials predicted to have 12), and might be enrolled in a workplace pension scheme in each of them. For simplicity’s sake you may decide to consolidate smaller pensions into one pot, so you can see how much you’ve saved in one place. The government has a free pensions tracing service if you’ve lost track.
However, it’s definitely worth seeking financial advice if you plan to consolidate your pensions, as it may not always make sense and you could unwittingly make yourself worse off.
» COMPARE: Pension providers
Funding retirement when you’re self-employed
If you’re self-employed and don’t have a workplace pension, you can set up your own SIPP and do it yourself, or, if you're under 40, have a look at the Lifetime ISA, which offers a way to save for retirement along with free money in the form of a 25% government bonus.
Who can help with retirement planning?
Getting professional help to plan your retirement can be a good idea. Financial advice can be expensive, but it might pay for itself in the long run with the extra money proper planning can generate.
There are also ways to get it cheaper, with some innovative providers and digital-only advice offerings shaking up traditional charging structures. There are also free sources on advice such as the government-backed MoneyHelper, which offers information on the phone or via webchat.
Over-50s can get an hour of free pension guidance through government service Pension Wise, and might also check out Citizens Advice and the Money Advice Service.
It is also important to be aware of scams — particularly once you hit 55 and can access your pension. Be wary of advisers calling you out of the blue and offering a free pension review, and always check any adviser you deal with is registered with the Financial Conduct Authority.
» MORE: All about pension advice
Image source: Getty Images
Hannah is an award-winning journalist with a background in the trade press. She writes about finance, asset management and business for Shares, Citywire, FE Trustnet, and interactive investor. Read more