The idea of a pension fund is that you contribute to it throughout your working life, and use the pot you’ve built up to provide an income when you retire. There are a number of ways to take the benefits when you retire, and you’re usually able to take up to 25% of the fund tax-free. Other options include:
- Using some or all of your pension to buy an annuity, which provides an income for the rest of your life.
- Receiving income payments from your pension fund, known as drawdown. The remaining money in the fund will have the potential to continue growing.
- Taking some or all of your pension fund as a lump sum. 25% of this will be taxfree (unless you’ve already taken the tax-free cash).
With the second and third options, the more you take from your pension, the less there will be to last you for the rest of your life. Also, taking large amounts from the pension will have potentially high tax implications at that time. People naturally tend to think more about saving for retirement as they get older, but that can mean that they don’t start saving early enough. In fact, around one-third of UK adults aren’t saving for retirement at all. And when it comes to the state pension, if you’re eligible, it’s still far below what most people hope to retire on.
The earlier you start saving, the bigger your pension
pot can grow
And the bigger the pot, the more options you have both in terms of when you can afford to retire and the lifestyle you can enjoy in retirement.
In 2018, Which? magazine found that retired households spent, on average, £2,200 per month. To receive a joint-life annuity at that level after-tax (including the state pension), depending on your circumstances you could need a pension pot of around £206,000.
That’s why it’s so important to check the value of your pension fund, understand the figures and get a clear picture of the lifestyle you can expect when you retire. Based on what you find out, you might want to review where your money is invested to make sure it stays on track to meet your objectives.
Whatever retirement lifestyle you’re hoping for, you need to be sure you’re on course to achieve it. If you haven’t begun saving yet, or if you’re worried that you’re not saving enough, the most important thing is just to make a start, and increase your savings little by little whenever you can.
The Chinese proverb says, ‘The best time to plant a tree was 20 years ago. The second-best time is now.’ If you’ve put off thinking about your retirement in the past, now’s the time to take action and secure a brighter future for yourself and your loved ones.
If you’d like to learn more about retirement planning, get in touch with a financial planning expert on 01603 967967.