A richer retirement
Your golden years are meant to be a time to focus on yourself, but seven million of you aren’t saving enough. Here are some tips on what to do…
When it comes to big financial investments such as buying a house or purchasing shares, everyone errs on the side of caution, devoting hours to research and deliberation, in order to stretch their money as far as it can go.
But many of you adopt an almost flippant approach towards saving for retirement. Half the UK population has no idea what the projected balance of their pension will be at retirement, and one in six has no details of where their contributions go, a study shows. You will need to have saved around £400,000 at retirement age to provide a yearly income of £20,000 for the next 20 years. Not much room for indulgence is there? But, with a spot of damage control, you can get back on track.
The best thing you can do is find out the facts. Make some enquiries as to how much you will have to play with as your working life draws to a close – this will give you an indication of how much more you will need to save to ensure you are financially comfortable later in life. The human resources (HR) department at work is the place to visit if you want to enquire about your company pension. It will be able to give you the details of where your pension scheme is held, and you should be able to request a pension forecast from the holders.
If you don’t belong to a company pension scheme, find out whether there is one available and get on it! Many companies will contribute an additional percentage to your fund themselves, based on your contributions. That’s money for nothing, but four in 10 of us decide to opt out, preferring more money now and forfeiting the extra cash later.
Don’t forget about any pension schemes you may have paid into while working for a previous employer: £300 million of forgotten pension contributions are currently not going to those who earned them. You can make sure you aren’t due any excess monies by logging on to www.thepensionservice.gov.uk, or calling them on 0845 600 2537. Make sure your government pension is secure. To qualify for a full basic State pension, you will need to have at least 30 qualifying years of National Insurance contributions behind you. Although this is less than the 39 years required previously, 30 years is still quite a sum to accumulate, especially if you plan to take a career break to focus on raising a family. You can pay in for the years you have off, though, which is worth consideration.
Widen the search
If you are married, check the facts about your partner’s company pension plan, too. Don’t make the mistake of automatically assuming that your spouse will provide for you both in your later years, as many men will have opted in to pension schemes at the start of their career, when they were younger and/or unattached, choosing cheaper single-life annuity over joint-life annuity. This means that should they pass away before you (life expectancy is less for men then women), the pension payments will cease, and you won’t see a penny of any savings that were left.
Recent changes to the state pension mean that if you are female and were under the age of 57 on the 6 April last year, you will now need to wait until you are at least 65 before you are eligible to start receiving payment. While this means you retire later, it also gives you the benefit of time.
If you do have a private pension scheme, start paying in the biggest contribution you can afford. The sooner you start, the longer youhave to build up your nest egg.
Choose an alternative
If you don’t have access to a company pension, consider a savings account like a tax-efficient ISA in order to squirrel away your funds. Another choice would be to open a stakeholder pension plan.
The scheme’s managers will invest the pension fund on your behalf. The value of your pension fund will be based on how much money you have contributed and how well the fund’s investments have performed. Be sure to do your research, as many of these plans can involve high charges, and you could end up with far less money than you had anticipated. Low-cost index trackers, which track stock market indexes, are the cheapest option, and you can compare charges on www.moneymadeclear.org.uk.
Once you have decided on the best place for your money to go, don’t ignore your growing fortune for the next 20 years – keep informed about its progress. Doing this could make the difference between having a comfortable retirement and being constrained financially, later.
What you do with your pension once retired can also make a big difference to your income. Most of us will buy an annuity that converts our fund into a guaranteed income for life once we reach retirement. Don’t just opt for the annuity offered by your pension provider – shop around, and speak to a financial advisor. The difference can be as much as 60% or more if you are one of the four in 10 with ill health who should qualify for a bigger ‘impaired life’ annuity.
It is tempting to retire as soon as you can, but the later you wait, the more time your pension pot will have to grow. Also, your funds will have fewer years to cover, so you will receive more per month the longer you hold off. In addition, by deferring your state pension, you can earn either extra state pension or a one-off taxable lump sum. For details, visit www.direct.gov.uk. As a woman, the average income you will get from your annuity is £99 a month, compared with £151 for men. On average, women take out annuities at the age of 59, while the figure for men is 62. But we both do so sooner than we are legally required to. If we delayed buying an annuity for 10 years, men could get 32% and women 24% more annual income.
Pay your mortgage off first
For most of us, our house is an investment made with retirement in mind, but mortgages are often harder to pay off than we thought, becoming a financial burden at the crucial moment. A property should not be seen as a replacement for a pension, and you should prioritise paying off your mortgage before you retire.
Aviva’s ‘Real Retirement’ report last year showed a quarter of 55-64 year-olds had an outstanding mortgage of £52,535, and one in five still owed more than £75,000. Aviva’s Clive Bolton said: ‘An increasing number of people are entering retirement with unsecured and secured borrowing. Aviva’s research shows about 10% of the proceeds of equity release is used to repay debt.’
Choose your home wisely
If you plan to downsize your house later in life to free up funds, consider investing in a property built in a retirement village. Prices start from about £60,000 and there are usually waiting lists for such properties, so your family won’t struggle to sell the place later. You may well need to move to a similar facility when independent living becomes a struggle, so instead of paying high rent, why not buy a property early on so your funds are put to better use. Or, you could buy a property with an extra room or floor and rent it out. Being a landlord is not a hands-off occupation and might well take up a bit of time, but it is a straightforward way of bringing in extra income.
Plan for after you’re gone
Act now to protect your family from debt after your funeral…
For many people, thinking about death can cause uncomfortable feelings. However, for the sake of your loved ones, it is important to make provisions for the future, otherwise you run the risk of leaving them in debt, which is obviously something you would wish to avoid.
Figures released by the Dying Matters Coalition found that half of UK adults have not made a financial plan for their deaths or talked about their wishes with their families – leaving behind hefty funeral expenses for relatives to cope with. In fact, figures fromLiverpool Direct show that the average cost of arranging a funeral is set to rise to £4,595 by 2019.
Signing up for life cover now will allow you to protect your family from the financial strain of any costs incurred from your death,and they will appreciate and take comfort in your foresight during a difficult time.