Are you one of the many people not putting money aside for retirement? Find out how, and why, you should save up for your prime
When it comes to investing in a new, exciting venture such as buying a house, everyone errs on the side of caution. People ask themselves questions such as, ‘Am I getting the best deal on a mortgage?’ and ‘What sort of loan shall I take out?’ Others devote hours to research in order to stretch their money as far as it can go.
However, many people adopt an almost flippant approach towards saving for retirement. Figures from a 2012 HSBC bank survey show that the average retirement in the UK is expected to last 19 years, however the typical person’s retirement savings mean that they will run out of money just seven years into their retirement.
Of those individuals not saving for retirement, three-fifths blame their decision on high living costs, saying they are holding them back, with those aged 35 to 44 years old saying they feel especially squeezed.
Indeed, you will need to have saved around £400,000 at retirement age to provide an annual 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 your research
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. If you need help working out how much money you have across all your assets, www.justretirement.com has a budget planner, calculator and a number of guides to assist you.
A new law means that every employer must automatically enrol workers into a workplace pension scheme if they are aged between 22 and State Pension age, earn more than £9,440 a year, and work in the UK. Check if the new law applies to you and when you may be enrolled into your employer’s scheme by visiting www.gov.uk/auto-enrolled-into-workplace-pension and enquire about your company pension by visiting your work’s HR department.
£300 billion of forgotten pension contributions are currently not going to those who earned them, so don’t forget about any pension schemes you might have paid into while working for a previous employer.
2. Be aware of the facts
If you are married, check 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 into 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 your partner pass away before you do (life expectancy is less for men than women), the pension payments will cease, and you won’t see a single penny of any savings that were left.
3. Do you qualify?
While women used to reach state pension age at 60 and men at 65, this is being phased out so that by 2018 both genders will qualify for a state pension at age 65. If you’re a woman born between April 1950 and 6 December 1953 and are unsure about what exactly your state retirement age will be, work it out at www.gov.uk/calculate-state-pension
According to Just Retirement, ‘Estimates suggest the average length of time a person spends in retirement is 25 years, yet much of our financial planning is based on a 10 to 15 year time horizon.’
4. Choose an ISA instead
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 on £££s
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 during your golden years.
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 – you have a right to shop around to improve your income in retirement.
Also, enhanced annuities offer higher income, and so it’s worth finding out if you might qualify.
7. Retire later
It’s tempting to retire as soon as you can, but the later you wait, the more time your pension pot will have to grow. Also, when you do retire, your funds will have fewer years to cover, meaning 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 more 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. If you delay buying an annuity for 10 years, men could get 32% and women 24% more annual income.
8. Pay your mortgage
Your house is an investment that’s often made with retirement in mind, however mortgages are often harder to pay off than first thought.
Indeed, it can become a financial burden at the most crucial moment. Findings published by the Financial Conduct Authority (FCA) in May 2013 suggested that many borrowers with interest-only mortgages may struggle to repay their balances at the end of their loan period.
However, according to the Autumn 2013 Real Retirement Report by Aviva, the overall picture of mortgage debt among over-55s has improved since the end of 2010; ‘Judging from the experiences of today’s over-55s, taking steps to pay off a mortgage is a clear route to financial success, while taking chances with stocks and shares is less advisable.’
Increasing your cash flow
By taking out equity release, homeowners can free up some money and use it to enjoy their retirement years
For couples or single homeowners aged over 55, an alternative method of generating cash without the upheaval of moving house is equity release – a loan secured against the value of the home.
Today’s equity release plans are designed to meet a range of different needs, from lump sums to smaller amounts taken over a period of time. Most people who decide to take out equity release plans have a particular objective in mind, though these can vary widely; from new cars to home improvements to holidays abroad, helping out children or relations with money, to just getting a little extra money to pay the bills each month.
However, equity release may not be the right choice for everyone,and it’s a big decision.
To fully understand the features and risks, visit www.justretirement.com
Words: Holly Quayle Image: Shutterstock