Your golden years are meant to be a time to focus on yourself, but seven million people aren’t putting away enough money.
When it comes to investing in an exciting venture such as buying a house, everyone errs on the side of caution. You ask yourself ‘Am I getting the best deal on a mortgage?’ ‘What sort of loan shall I take out?’ You tend to devote hours to research in order to stretch your money as far as it can go. However, many adopt an almost flippant approach towards saving for retirement. In fact, new research by HSBC bank found that workers in the UK are the worst prepared for retirement – stating that some will run out of savings just seven years into their twilight years. Of those not saving for retirement, three-fifths blame high living costs, saying that they are holding them back, with 35 to 44-year-olds saying they feel particularly squeezed. 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.
1. Start researching
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. 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 people decide to opt out, preferring more money now and forfeiting extra cash later. Don’t forget about any pension schemes you may have paid into while working for a previous employer: £300million 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.
2. 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 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 than women), the pension payments will cease, and you won’t see a penny of any savings that were left.
3. Give generously
While women used to reach state pension age at 60 and men at 65, that is being phased out so that by 2018 both will qualify for a state pension at age 65. If you are a woman born between April 1950 and 6 December 1953 and are unsure about what your state retirement age will be, visit www.gov.uk/calculate-state-pension to work it out. As Cathedral Financial Management (www.cfmltd.co.uk) says: ‘Many people would prefer to retire earlier than the state pension age, however, and they in particular need to ensure that they have the financial resources to enable them to do so.’
4. 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 the amount of money you have contributed and how well the fund’s investments have performed.
5. Keep tabs
Once you have decided on the best place for your money to go, don’t ignore your growing fortune for the next 10/15 years – keep informed about its progress. This could be the difference between having a comfortable retirement and being constrained financially, later.
6. Pension pitfalls
What you do with your pension once retired can also make a big difference to your income. Most people will buy an annuity that converts their fund into a guaranteed income for life once retired. Don’t just opt for the annuity offered by your pension provider – shop around.
7. Retire later
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 On average, women take out annuities at the age of 59, while men do it at 62. But both do so sooner than when legally required to. If you delayed buying an annuity for 10 years, men could get 32% and women 24% more annual income.
8. Pay your mortgage
Your house is often an investment made with retirement in mind, but mortgages are harder to pay off than first thought. It becomes 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 in 2012 showed that one in five people over 55 had an outstanding mortgage. Clive Bolton, Aviva’s retirement solutions director, said: ‘The number of retirees who are still paying off a mortgage is growing. Few people are in a position to retire without this type of obligation. It’s likely that people keep working longer or turn to other options.’