Pensions may sound very tedious and feel like a pain in the backside when it comes to sacrificing your monthly wage, but it’s integral to your future.
For years, professionals have debated whether a pension will even cover you when you reach the age of 65.
Will it be enough? Does it depend on how long you live?
Well, it all boils down to a number of variables.
For instance, if you like to splash the cash on expensive things, you may start to feel the squeeze a lot sooner than someone who likes to budget.
And then there’s the fact of when you retire.
Legally, people can access their pensions from the age of 55 now, which potentially gives you a lot of years to live without working.
It’s the classic debate of whether you live for the moment as you get older and start ticking things off your bucket list, or you live a modest lifestyle and budget it.
In truth, only you as an individual can answer that.
If you fancy jumping out of a plane at the age of 65, go for it.
But the main thing is that you start considering your pension as soon as possible.
Think of it this way, the earlier that you start saving, the more money you’ll have to spend on wonderful things when you’re grey and old!
To help give you a bit of guidance, here are a few considerations you may want to think about.
Work out your needs
One of the most important elements of financial planning for retirement is establishing how much income you’ll need to easily cover your bills, mortgage and living expenses.
A financial planner at Appleton Gerrard, Kusal Ariyawansa, says:
“For many, converting your savings into a retirement income has the same effect as a cold shower, as there is a significant drop in income.
Your starting point should be to identify your fixed costs, which will reveal how much money there is to maintain your lifestyle above and beyond the bare necessities.”
Plan for the worst
It may seem a little depressing and morbid, but what happens if something expensive crops up when you retire?
For example, your car breaks down, you require special medical help or you live longer than the average lifespan.
The director of IncreaseYourPension.co.uk, Craig Palfrey, says:
“Retirees have to test out any plans against their position being that of an outlier”.
“You might receive a number saying you are likely to live to 86 on average, but what happens if you live to 106?”
To help factor this in, you should always plan to add in an extra half of the total of your yearly living cost.
So for instance, if you believe that you’ll spend £12,000 a year on living costs, always plan for £18,000.
So at least if you do live a healthier and longer life, you’ll be covered!
Plan your retirement
This may sound bonkers to a twenty-something-year-old, but if you act smart now, you’ll be laughing your way to the bank when you reach 65.
One thing a lot of retired professionals forget to consider is the time element.
Think of it this way, I’m sure that there are hundreds of things you’ve always wanted to do (however big or small), but you don’t have the time to do them every week.
That’s because work and general life events get in the way.
But when you’re retired, you are gifted more time to do these kinds of things.
According to a director of Wingate Financial Planning, Alistair Cunningham:
“Your expenditure needs typically start off high, possibly more than in working life, as you do all the things you wanted, but lacked the time or money”.
“Then your needs start to wane – that’s the downward movement of the tick – as you get slightly older.”
With this, Mr Cunningham means that a lot of retired professionals remember all of the fun things they want to do, but not the fact that the cost of care is an unfortunate factor we all have to think about.
Speaking to a reliable financial adviser may help you come up with a realistic plan which factors in all of these aspects of retiring.
Work out whether a workplace pension scheme is right for you
Once you’ve come up with a plan on costs, your next step is to consider whether a workplace pension scheme is right for you or not.
If you’re unaware of what it is, a workplace pension scheme is where you give up part of your salary every month to contribute to your pension.
And in return, your employer will give you a non-cash benefit, such as an added contribution to your pension.
Once you accept to do this, your salary will be lower, meaning you don’t have to pay as much tax and National Insurance.
However, it’s worth considering the other side of the coin with utilising a workplace pension scheme too.
For example, a lower salary may impact maternity pay or mortgage applications and may even mean your life cover through a scheme at work could be less.
Before accepting, it’s always worth checking with your employer to find out about the T&Cs.
For more information on workplace pension schemes, visit the Money Advice Service.
Your other choices include setting up a personal pension. This is particularly important if you are self-employed.
The three types of personal pensions include:
- Basic personal pensions – where you make monthly payments into a plan which can offer a wide variety of investment strategies to suit your needs.
- Stakeholder pensions – this is where you contribute a low and flexible amount, but have capped charges and limited choices with your strategy.
- SIPPs (self-invested personal pensions) – this is ideal if you want to contribute larger amounts, as you have a greater control over the way your pension savings are invested. But it’s worth noting that this comes with higher charges, so you should swot up on the subject if you do go with this one.
Whatever type of pension you choose to go with, the important thing to remember is to actually start now!
Plan for your future and you’ll be able to live a much more comfortable life when you get older.