How should I plan for my retirement?

by | Feb 1, 2021

If you have a defined contribution pension scheme – whether private or through your employer – your retirement savings have probably been hit quite hard by the COVID-19 pandemic over the past 12 months. 

That’s because pension funds invest in the stock market and recent turbulence, which has caused big rises and falls, have had a significant impact on how much is in your pot. 

The average pension lost around 15% when the coronavirus first hit the stock market back in March 2020, before recovering 13% of the lost ground by the end of August 2020. 

Obviously, savers who are in their 30s or 40s have time on their side to potentially ride out market volatility and get their pension savings back on track. 

The same can’t be said for people nearing retirement. According to a report from the People’s Pension, 74% of people either approaching retirement or aiming to retire in the near future are on course to run out of money in their early to mid-80s. 

In addition, only one in ten respondents are making detailed money plans for the future, suggesting that the vast majority have their heads in the sand. 

Whatever stage of your life you are at, planning for your retirement has arguably never been more important than it is now after last year’s events. 

Why is planning important?

In short, retirement planning has evolved at a rate of knots over the last two decades or so. 

Fewer people enjoy the benefits of a final-salary pension, which pays out an income based on how much you earn when you retire, while you have to wait longer to receive the state pension. 

The state pension is nowhere near enough for most people to retire on in 2020 and beyond, due to the cost of living in the UK. Think of the state pension as more of a top-up to other retirement income, rather than something to rely on. 

Workplace pensions have become more common in recent years, after the introduction of auto-enrolment in October 2012. Since then, more than 10 million employees have been automatically enrolled into defined contribution pension schemes. 

Crucially, around five million self-employed workers are not eligible for workplace pensions. That might change in the future if new legislation comes in but last year, investing in property remained the most popular retirement planning option for the self-employed, according to the Office for National Statistics.

Personal pensions, stakeholder pensions and self-invested personal pensions can also have a role to play in a retirement planning strategy, especially for those who are excluded from auto-enrolment like the self-employed. 

There are plenty of options to consider when it comes to accumulating your pension pot, which will hopefully allow you to maintain a comfortable quality of life after you retire. Seek professional advice to fully understand your choices. 

How much will be required?

The longer you are able to save for retirement, the lower the amount you will need to set aside. Obviously, that implies that the earlier you start saving for retirement, the easier it should be.

With the cost of living in the UK increasing and many variables to consider – not least the age at which you start saving and when you intend to retire – only you know how much you need to fund a comfortable retirement. 

A recent study from SunLife suggested that the average person over the age of 55 needs £114,436 to retire in 2021. 

On average, respondents aged 55-60 required more (£180,741) than those in their 60s (£101,811). 

That’s by no means a one-size-fits-all approach, but it does serve to illustrate how retirement goals differ depending on the age at which you start saving into your pension pot. 

Savers in their 20s, for example, would require much more than people nearing retirement. But they could put in smaller amounts due to the having many years of their careers ahead.

Whatever your age, you can put up to £40,000 into your pension pot in 2020/21, although a lower amount can apply if you’ve:

started flexibly accessing your pension from the age of 55

your net-relevant earnings are lower

if you earn over a certain amount.  

If the total value of your pension pot exceeds £1,073,100 when the time comes to start drawing your pension then you may have to pay a tax charge.

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