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With UK life expectancy sitting at an average of 81 years, and over 15,000 centenarians recorded in 2020, it is vital to plan for a long-lasting pension. Given that most retire in their 50s or 60s, their retirement plan needs to potentially carry them over the next 30+ years. Yet how can you ensure your pension pot lasts?
Below, our financial planners in Edgbaston and Warwick offer five ideas as you craft a sustainable pension plan with a trusted professional. We hope this is helpful to you. If you’d like to speak to an independent financial adviser then you can reach us via:
T: Edgbaston 0121 446 5815
T: Warwick 01926 888091
E: [email protected]
#1 Get the best State Pension
The State Pension is based on your National Insurance (NI) record, and you need at least 10 “qualifying years” to get any State Pension at all. At least 35 qualifying years gives you the full new State Pension, which equates to £9,627.80 per year (£185.15 per week). Your State Pension is also with you until you die, giving you an indefinite source of retirement income.
It costs £824 to “buy” a full missed year on your record – or, £15.85 per missing week of NI contributions. Whilst this may sound like a lot, this could equate to £1,000s extra across your retirement. Your State Pension income also rises each year by at least 2.5% under the “triple lock” system. This helps to keep your income rising with the cost of living (although it is not guaranteed, as the recent temporary suspension of the triple lock system demonstrates).
Taken together, this makes the State Pension arguably the best pension type to invest in. So it is worth getting the best deal you can from it.
#2 Pay off your mortgage
In 2017, almost 75% of over-65s owned their own home outright. However, in recent years the number of “pension renters” has risen by 93%. A mortgage or monthly rent can take up to 42% of an income in retirement. To make a pension last in these conditions, you typically need to save much more than someone who owns his/her home fully. For those committed to renting in retirement, make sure you run your plan past a qualified financial adviser or planner.
#3 Hold onto a defined benefit pension
Broadly, there are two types of workplace pension. The first is called a defined contribution pension, which involves a “pot” of money that you and your employer contribute to throughout your job. The second is a defined benefit pension (sometimes called a “final salary” scheme), and this pays you a guaranteed lifetime income in retirement – from your employer. It usually rises each year with inflation, too.
These latter schemes are often called “gold plated” due to their generous guarantees which are difficult (if not impossible) to replicate elsewhere. They provide a stable, continuous stream of income in retirement. This, alongside your State Pension, can offer a great sense of security. Whilst in some cases a transfer may be suitable, most will do best to hold onto any final salary scheme they have.
#4 Take care with your tax-free lump sum
From age 55, most people can withdraw up to 25% of the value from their pension pot(s) as a tax-free lump sum. Whilst this can be a good idea, it is wise to consider the impact that this will have on your pension savings. Taking one or more tax-free lump sums could lead to a smaller pot at/in retirement. Without careful planning, this could mean less retirement income to fund your lifestyle. In the worst cases, it might lead to running out of money. Consider getting some financial advice if you are wondering about the best option for you.
#5 Keep up your contributions
When the economy and/or markets are struggling, it can be tempting to reduce or even stop your pension contributions to “free up” more salary so you can focus on your more immediate financial concerns. However, doing so risks missing out on valuable pension growth that you could benefit from in the future.
This risk is amplified the further away your retirement date is, since the more time you have the more growth potential you have for your pension (due to compound returns). Therefore, make it a priority to always contribute every month from your salary – even if this is just the 5% minimum required under UK auto enrolment rules.
Take advantage of any generous benefits offered by an employer. Some, for instance, will match your pension contributions up to a limit (e.g. 10%). This equates to “free money” for your future retirement and, when combined with the tax relief on your contributions offered by the UK government, could make a huge difference to your lifestyle in retirement.
Whilst present financial matters are important, be careful not to focus so much on these that your future financial plan is put at risk. You will thank yourself later!
We hope this content has been informative and inspired you to develop your own financial plan. Please get in touch if you’d like to discuss these matters with us via a free, no-commitment consultation with a member of our team:
T: 0121 446 5815
E: [email protected]