How to plan for your retirement

Everyone wants to be able to enjoy the retirement they envisage, but it’s important to have enough money put aside to make it possible.

Despite this, research by the Institute for Fiscal Studies has found that a fifth of working-age private sector employees don’t save into a pension in any given year. 87% are saving less than 15% of their earnings, meaning they risk not having enough put away for their retirement. Even more worryingly, fewer than one in five self-employed workers save into a pension.

If you want to avoid missing out on the retirement you dream of, the earlier you start planning (and saving), the better. In this article, we look at practical ways to plan for retirement and avoid some of the most common pitfalls.

• How do you envision your retirement?
• How much do you need to retire?
• What assets and pension(s) do you have?
• When do you want to retire?
• What are your retirement options?
• Getting financial advice

How do you envision your retirement?

The first question you need to ask when planning your retirement is: ‘What do you want your retirement to look like?’. Deciding how you want to live your retirement plays a crucial role in planning for retirement.

You may dream of travelling the world or moving to another country. You might prefer to enjoy a quieter retirement and not have to work. On the other hand, you may want to keep working, but reduce the number of hours you commit to it.

Whatever your goals, it’s essential to define them so you can create a comprehensive retirement plan that helps you achieve them.

How much do you need to retire?

Retirement planning is inherently linked to your financial goals and the lifestyle you envision. Begin by estimating your future expenses, including housing, healthcare, leisure activities and travel. Consider whether you’d be happy with a more modest or luxurious lifestyle in retirement.

This evaluation will help you set a realistic financial target for your retirement savings, and determine whether you need to make any adjustments to retire at the age you want to. It can also help you determine whether you’ll need to free up capital, such as by downsizing your home.

When working out how much income you’ll need in retirement, The Retirement Living Standards (TRLS) is a good starting point. These define how much annual income you’ll need to maintain three types of lifestyle:

• Minimum. Enough to cover your needs with some disposable income left over.
• Moderate. What you need for extra financial security and flexibility.
• Comfortable. To give you a lot of financial freedom and some luxuries.

For example, to maintain a minimum lifestyle as a single person, the TRLS says you’ll need an annual income of £14,400, or £15,700 in London. For a moderate lifestyle as a couple, you’ll need £43,100 per year, or £44,900 in London. To enjoy a comfortable lifestyle as a couple, you’ll require an income of £59,000 per year or £61,200 in London.

You’ll need to bear in mind that the recommended income levels will change year by year. This is why you need to account for inflation in retirement planning as it can affect both the value of your pension pot and the income you get from it.

What assets and pension(s) do you have?

If you are to meet your target retirement age, you need to evaluate all of your assets (savings, property, investments and pensions) and how best to use them to meet your goal retirement age and lifestyle.

When it comes to your pensions, these could be invested into a number of different assets including shares, bonds or even commercial property. You may also have plans with several providers if you’ve switched employers over the years and it’s common for people to lose track of their pension plans. If you think you may have done so, you can phone the Pension Tracing Service on 0800 731 0193 or submit a pension tracing request online. This free service searches a database of workplace and personal pension schemes and will locate the contact details you need. This also gives you an opportunity to consolidate your pension pots.

Once you have tracked down all your pension pots and details on any other assets, you can then use the Government’s Pension Calculator to get a forecast of your retirement income. If it is likely that you won’t have the income you need to retire at your preferred age, you’ll need to consider how to reach that goal – be it reducing the cost of the lifestyle you want, working for longer but reducing your hours, or contributing more to your pensions, for example.

Don’t forget that most people will get some form of State Pension, which you can currently access from age 66. This will rise to 67 by the end of 2028 (with further retirement age increases possible). The amount you receive will depend on the National Insurance (NI) contributions you have made. If you don’t have a complete record of qualifying NI contributions, you can ‘buy back’ any gaps in the previous six years. In addition, until 5^th April 2025, you can buy back any missing years or partial years between April 2006 and April 2016.

When do you want to retire?

These days, people have more flexibility about when they retire. With the end of the Default Retirement Age in 2011, there is now no compulsory retirement age. Theoretically, this means you can remain employed as long as you like. However, it’s worth noting that an employer can ask you to retire if they can justify why and at what age.

You also need to remember that the earliest you can start drawing from a personal pension is age 55 (this will rise to 57 in 2028). For most people, this will be the youngest age they will realistically retire at. While some people will want to retire early, others prefer to retire later for a more financially secure retirement (although there is nothing to stop you from investing during retirement, so your pension pot continues to grow). If you are considering stepping back from work before retirement age, understanding your tax-efficient savings options is crucial.

Essentially, the age you choose to retire will depend on how you want to spend your retirement, your health, and what you can afford.

What are your retirement options?

Your retirement options depend on your pensions and assets and how you use them to meet your goals.

There are different rules about accessing personal pensions, and we recommend you get independent financial advice to help ensure you meet your retirement goals. However, options may include:

• Taking up to 25% as a tax-free lump sum. Any further withdrawals will be subject to income tax.
• Buying an annuity. This gives you a guaranteed income until you die. Provision can be made for a spouse and other guarantees can be included.
• Flexi-access drawdown. This allows you to dip into your pension when needed, leaving the remainder invested. Unlike an annuity, you can pass on the remaining money when you die.
• Letting your pension grow. If you decide to retire later, you can continue growing your pension pots. This can potentially result in a greater income when you retire.

It’s also worth noting that if you have other sources of income other than your pension, this could have tax planning implications, too.

When considering your retirement options, you’ll also need to determine whether you will have any outstanding debts. You may choose to take a lump sum from your pension to settle them, or you could opt to semi-retire and reduce your working hours.

Getting financial advice

Navigating the complexities of retirement planning can be challenging, and seeking professional financial advice is crucial. As independent financial advisers we can help you assess your current situation, establish realistic retirement goals and develop a tailored strategy to achieve them with the help of tools, such as cashflow modelling. We can provide insights into tax-efficient ways to draw income from your pension, optimise your investment portfolio and ensure that your retirement plan aligns with your unique circumstances.

While you can use online calculators to make broad pension income predictions, they should never replace tailored advice from a qualified adviser. If you’d like help planning your retirement, speak to a member of our specialist team today at 01603 967967.

Please note, the value of investments and any income from them can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future. The value of tax benefits depends on your individual circumstances and the laws concerning these can change.

None of the information in this article represents a recommendation about the income you may receive in retirement.