For many people, “don’t know” will be their honest answer to this question. With Britons increasingly working for a number of employers during their careers, having a range of pensions is common. However, it can be easy to lose track of old pension plans – you may not even remember the last time you saw a statement.
Do you know how much retirement income these pensions will provide? Many people will suspect their existing pensions won’t be enough. Unfortunately, they may well be right.
Few employers still offer generous “final salary” pension schemes – where your pension is calculated according to your salary and years of service. And most of us are saving less than we need to for the retirement income we would like to have.
Recent research for Brewin Dolphin found that 45 to 54 year-old Britons face an average shortfall of £370,000 in pension savings at age 65.1
Our eight-step guide below could help you get your retirement planning on track. From working out what pensions you already have and how much you will need, to improving and boosting these savings, follow our path to a more comfortable retirement.
1. WORK OUT WHAT YOU’VE GOT
Working out what pensions you already have should be a starting point for your retirement plan.
Dig out the latest statements you have for all your pensions, including from old employers and personal pensions.
You can also get a forecast of your state pension via https://www.gov.uk/check-state-pension
You should be sent an annual statement for each of your pension schemes, including any employer-based arrangements and personal pension plans, even if you are no longer contributing to them. If you don’t have up-to-date statements, you can ask for these to be sent to you. You may also be able to access pension values online via your pension company/scheme website.
2. CHECK WHAT YOUR PENSION COULD BE WORTH
As well as telling you what your pension is worth now, annual statements will also detail what your pension might be worth at retirement.
These forecasts (don’t think of them as anything more than rough estimates) will be based on a range of assumptions including investment growth and inflation between now and retirement.
It is important to consider the effect of inflation because over time this can significantly reduce the spending power of your pension.
3. WORK OUT WHAT YOU’LL NEED
Whether your pension will be enough to pay for the retirement you want will depend on the savings pot you amass as well as the cost of your lifestyle when you retire.
Working out what income you will need in retirement may not be straightforward, however.
Your life in retirement will be different from your working life: some costs may go up while others will reduce.
You may spend more on holidays and leisure (especially in the earlier years of retirement) but your housing costs may be lower. While you may no longer have the costs of bringing up children you may still want to help them financially, and there could be grandchildren to think of. In your later retirement years you could have care costs. The traditional rule of thumb has been a target pension income of two-thirds of your salary.
4. TAKE STEPS TO TRY TO IMPROVE YOUR INVESTMENT PERFORMANCE
Are you happy with the investment returns which your pension plans are achieving? Would you like the opportunity for higher returns – even if it meant taking more investment risk?
Holding a range of pension plans can make it hard to see where all your money is invested and to assess the risks you are taking. It could also mean you are paying more than you need to in charges.
Workplace pensions often end up in default managed funds that may not provide the best performance, particularly for people with many years to retirement. On the other hand, personal pension contributions can be left forgotten in cash for years, earning little or no return.
Personal pensions in particular may offer a bewildering range of investment options.
A Brewin Dolphin financial planner can advise on whether you would be better off consolidating some or all of your pension plans. They will review where your money is currently invested and advise on the optimal investment strategy for you, taking into account your attitude to risk, your investment timeframe and your broader circumstances.
5. REVIEW YOUR PENSION CONTRIBUTIONS
More than half of people do not think they are saving enough for retirement, according to recent Brewin Dolphin research.2
Among those on incomes above £50,000, 43% thought they were not saving enough. Even for people with incomes of £100,000 to £150,000, nearly 30% felt they did not save enough.
How much should you be saving?
Partly, it will depend on what you have already accumulated. Ideally you will have been saving from when you first started work.
Even delaying contributing to a pension by a few years can have a dramatic effect on the value of your retirement savings.
The cost of delay can be illustrated by the contributions needed to produce a pension worth £20,000 a year (in today’s money) from age 68. 3
For a 25 year-old, to achieve this pension could require gross contributions of £790 a month.
But for someone who waits until age 40 to start saving, the required monthly contributions would be nearly double, at £1,425.
And for someone who does not start saving until age 50, the contributions would need to be even higher at £2,480 a month.
Generally, there is a limit on pension contributions of £40,000 a year – which includes contributions by your employer.
But this “annual allowance” is reduced for those earning over £150,000 and can be as little as £10,000 for the highest earners.
However, it may also be possible to “carry forward” unused contribution allowances from recent years.
Pension savers receive income tax relief on their contributions at between 20% and 45%, depending on the rate of income tax they pay.
Better still, if you contribute through a workplace pension your employer will also contribute on your behalf, and you could qualify for National Insurance savings using a so-called “salary sacrifice” arrangement.
Employer top-ups in particular can turbo-charge the value of your pension contributions, so it is worth checking you are making the most of any workplace generosity offered.
6. CONSIDER ALTERNATIVES TO PENSIONS
Pensions are not the only way to save for retirement. Tax-free ISAs are a popular savings option while many people see property – particularly in the form of buy-to-let – as their retirement nest egg.
It is important to be aware that there is a limit on the size of overall pension savings you can accumulate – currently £1.03 million (for 2018/19, and rising annually in line with inflation) – without facing a hefty tax charge of up to 55% on the excess.
This “lifetime allowance” (LTA) for pensions could also be a challenge for people whose retirement savings are currently less than £1 million as well as individuals with sizeable final salary pension entitlements. Investment growth and ongoing contributions could lead to you breaching the LTA in future.
A Brewin Dolphin financial planner can consider whether you are likely to be impacted by the lifetime allowance limit and what you can do about it. Our experts can also advise on other long-term savings possibilities, including higher-risk investments such as Venture Capital Trust (VCTs) and Enterprise Investment Schemes (EISs) which also offer upfront income tax relief of 30%.
7. THINK ABOUT HOW AND WHEN TO CASH IN
Recent pension freedoms have given retirees considerable flexibility over how they draw an income or withdraw lump sums from their accumulated retirement savings.
Pension savings can be accessed from age 55. You no longer have to buy an annuity – an income stream for life – and can choose how much income you take and when to take it.
You could take your whole pension fund as cash in one go – with 25% being tax-free and the rest taxable. Other options include taking a lump sum now, with further withdrawals when you want or an ongoing regular income (via so-called drawdown or an annuity).
However, the danger of these pension freedoms is that people withdraw too much money too quickly and risk running out of money before they die.
It is also possible to pass on your pension savings completely free of tax. So, as well as being a tax-efficient way to invest, pensions can be a very useful way to reduce inheritance tax bills.
8. START PLANNING NOW
Too many people fail to seriously consider how they are going to manage financially in retirement until they are about to retire. It is only then that they discover that their pension is not on target to meet their retirement aspirations.
When you are living a busy life it can be difficult to find time to consider your long-term plans: your mortgage or your children’s education might be more immediate financial priorities; your career or running your business can be more pressing demands on your time.
However, getting your pension on track as soon as possible could save you and your family a financial headache later on.
As explained earlier in this guide, delay can also be costly. Ideally you will have started contributing to a pension early in your working life.
But the good news is that mid-career can be a good time to build on your existing savings.
You may be hitting your peak-earning years, have some spare funds to save, and can potentially benefit from higher tax relief on your pension contributions.
Another reason to take advantage of existing pension tax breaks is that there is no guarantee they will be there in the future.
The government has already cut the annual allowance to £40,000 – and as little as £10,000 for very high earners – while reducing the lifetime allowance from its £1.8 million peak in 2011/12. Higher-rate income tax relief on contributions could be next. So it makes sense to make the most of what’s on offer now.
We hope our step-by-step guide to getting your retirement plan on track has been useful.
Taking control of your pension could be potentially life-changing for you and your family. But pensions can be complicated, and it is important to keep monitoring progress towards your retirement goals. It makes sense to get expert advice tailored to your situation.
Our financial planners can help assess your current position, work out your financial needs in retirement and produce a plan for achieving your goals and aspirations.
1 Source: The Big Squeeze Brewin Dolphin Family Wealth Report Part 2 Centre for Economics and Business Research. 45-54 year-olds are looking for a minimum annual income of £25,000 in retirement. Deducting £8,000 for the state pension, this leaves a required pension income of around £17,000. At current rates, an inflation-linked annuity of £17,000 payable to a healthy, single non-smoker costs around £530,000 at age 65. Given the expected retirement pot of this age group is just £160,000, this implies a substantial pensions gap of £370,000.
2 Source: Mind the Generation Gap Brewin Dolphin Family Wealth Report Part 1 – The Baby Boomers
3 Source: Brewin Dolphin. Figures assume annual investment growth of 2.5%; inflation of 2.5%; fund charges of 1% a year; and contributions increasing by 4% annually.
The value of investments can fall and you may get back less than you invested.
No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.
Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.
The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.