This week I was one of the six million 39-47 year olds that discovered they’d be receiving the state pension at 68 rather than 67. When something isn’t set to impact you for 20 or 30 years it’s easy to brush off the announcement, and what’s one extra year anyway? But there are steps an individual should be taking to prepare for that extra year.
It has been difficult to ignore the pension reforms over the last few years, arguably even more difficult to count them, and we now face a very different retirement landscape to the generations that have come before us.
Firstly, we’ll be 68 and not 65, but we’re also expected to live longer so maybe this does make some economic sense, although my husband and I still dream of retiring early (provided our children live within their means when they get to university).
Secondly, we can access 25% of our pension pot tax-free at the age of 55, this gives us more options when we get close to retirement. We have the freedom to decide what we spend our hard-earned savings on, whilst the papers talked of lamborghinis and exotic holidays, the reality is actually closer to more flexible investment options.
Thirdly, the defined benefit pension schemes have largely closed. Those were the schemes where you would receive a percentage of your final salary in retirement for the rest of your life. What we have now is defined contribution, but that can make it a little harder to plan as you need to ensure your savings out-strip inflation so you have enough.
Saving for retirement
This announcement is set to save the government a whopping £74 billion, and with an ageing population you can potentially see why they might have done it. But when it came on the same day we discovered Chris Evans was paid £2.2 million you can’t help but feel a little hard done by.
So if you don’t have a salary like Chris Evans, or even if you do, there are a few things you should be doing to prepare for retirement:
- Save. The sooner you start the lower your monthly contributions can be because of the magic of compound interest. Those in their 20s have the best opportunity, although usually lower salaries.
- Maximise the benefits available to you. With auto-enrolment many employers match your contributions, that’s like getting more salary. If your employer matches your contributions to 3%, try and save 3% of your salary so you get the full benefit. Don’t forget the tax relief from the government either. If you want £1,000 going into your pension you may only need £800 or even £600 to get there as you get the equivalent of your income tax back.
- Do what is right for you. Don’t deprive yourself from enjoying life right now, but do make sure you’re putting something aside so you can live the life you want. Have a think about what future you looks like and how much money you might need to achieve that. Work backwards from that point and remember the levers you have to pull when investing: time, risk and contribution. If you can’t afford to increase your contributions, would you maybe take more risk (understanding your increasing the chances of losses as well as gains), or would you put that retirement date back a bit further?
With greater pension flexibility comes greater responsibility. On the one side this is fantastic, you’re the captain of your own ship and if fast cars and no food is what you want, that is exactly what you can have. But on the other side the onus is on you, if you don’t have the retirement of your dreams that is down to the steps you took.
Advice is only going to get more important for those that won’t retire until 68: how much should you save, should you use your ISA or your pension, can you count your home as your pension, the list goes on. And when you reach retirement the options are changing. We have more than just an annuity available to us, and we’re fairly unlikely to have a guaranteed income which means our parents might not be the best people to go to for advice. As I go into summer holidays, and have six weeks to entertain the family, I will still be thinking about and prioritising savings, because the alternative just doesn’t look that pleasant to me.