The information contained in this article was correct at the time of writing
August 13, 2023
Navigating Pension Planning
Introduction
Planning for retirement is one of the most important financial decisions people make in their lifetimes. With people living longer than ever before, having an adequate pension pot is crucial to funding 20, 30 or even 40 years of retirement. However, pensions can seem complicated and planning for retirement requires navigating complex rules around contributions, investment choices and withdrawal options. This blog provides an overview of pension planning basics, outlines key considerations at different life stages and gives tips to help you make the most of your pension savings.
Pension Basics
There are three main types of UK pensions:
– State Pension – this is a payment from the government that you receive once you reach state pension age. It is based on your National Insurance contributions and in 2023/24 the full new state pension is £185.15 per week.
– Workplace pensions – these are arranged by your employer and they and you contribute money into a pension fund. Under auto-enrolment rules, employers must enrol eligible staff into a workplace scheme.
– Personal pensions – you arrange these yourself with a pension provider and choose how much to contribute. This allows the self-employed or those without a workplace pension to save for retirement.
When you contribute into a pension, you receive tax relief up to your highest income tax rate. This helps boost your savings. Pension funds are invested with the aim of growing your money. When you come to take your pension, you can withdraw up to 25% as a tax-free lump sum then the remainder is taxed as income. There are various options for how to take your pension including annuities which provide a fixed income or drawdown which allows flexibility.
Key Considerations By Life Stage
Pension planning needs to adapt as your priorities and responsibilities evolve over your working life. Here are key things to consider at different life stages:
Starting Out (20s to mid-30s)
– Join your workplace pension scheme – saving early and benefiting from compound returns makes a significant difference to your eventual retirement pot. Under auto-enrolment, you’ll have at least 3% from your employer matched by 4% from your salary going into your pension scheme which gives a solid foundation.
– Consider topping up contributions – if you get a pay rise or come into some extra funds, try allocating a portion such as 50% into your pension to give your savings a boost.
– Review investment choices – default funds may be cautious so review if a higher risk/reward profile aligns with your long-term horizon.
Mid-Career (mid-30s to 50s)
– Check you are on track – according to Which? you should have built up a pension pot equal to 2x your annual salary by 40 and 6x your salary by 50 if you are hoping for a reasonable standard of living in retirement. If you fall short, upping contributions even slightly can close the gap.
– Make use of annual allowances – you can contribute £40,000 per tax year into pensions and benefit from tax relief. If you haven’t fully used allowances in recent years, carry forward allows you to top up by unused amounts from the last three tax years. This can help you give your pension a surge.
– Consolidate small pensions – if you’ve accumulated old workplace pensions, consider consolidating them into one place so everything is invested in one place and easier to manage. Make sure to compare charges and investment options first.
Preparing for Retirement (over 50s)
– Receive tailored advice – speaking to a financial adviser around 5-10 years before your target retirement date is recommended. They can help you with complex decisions around managing risk, drawdown strategies and can assist with putting all your assets and financial arrangements in order for later life.
– Consider your changing lifestyle needs –your income needs are likely to evolve in retirement. Cohort research indicates over 65s spend more on leisure pursuits early in retirement while over 75s allocate more budget to health and care costs later on. Model different scenarios.
– Understand tax implications – be aware that withdrawals from pensions in excess of the 25% tax free lump sum allowance are taxed as income. Structure withdrawals from different pension and non-pension savings vehicles to minimise high tax charges.
Tips for Maximising Your Pension
Here are 5 additional tips for making the most of pension planning:
1. Consolidate pensions into one place sooner rather than later to avoid losing track of and wasting small old pots.
2. Take advantage of employer matching, tax relief and compound growth by putting aside as much as early as possible during your career.
3. Review investments regularly as your risk appetite and capacity for volatility will evolve from growth assets early on to protecting capital as you near retirement.
4. Model different contribution increases to find an affordable rise that makes an appreciable difference. Just a few % extra can add £1000s over time.
5. Shop around for value and customer service – charges can slash thousands off eventual pots over time so compare sites like Boring Money or Moneyfacts.
In Conclusion
Navigating pensions can be complex across the stages from initial participation, increasing contributions as your career progresses, investment choices and managing withdrawals in later life. But the rewards in terms of funding your ideal retirement make understanding the basics and seeking impartial advice incredibly worthwhile. If any part of the pensions journey feels confusing, please get in touch and we would be happy to offer tailored support. Even small steps today can make your retirement tomorrow more comfortable and fulfilling, so take control of your future.
