We all know how we want to spend our retirement, whether it’s exploring the jungle, baking for your grandchildren or salmon fishing in the highlands. After years of navigating the rush-hour commute, working long hours and making sacrifices for your children, it’s time to put yourself first. One thing’s for certain: you’ll need to be able to afford it.
The difficulty of the pensions landscape and its use as a political football each election cycle make it easy for some Brits to put their head in the sand when it comes to saving for their pension, writing it off as something they can’t afford.
But the good news is that many overestimate how much they’ll actually need. It all depends on how you plan to live out your twilight years, but if you want a comfortable life with a couple of European holidays each summer, you’ll need around £26,000 a year, research from consumer group Which? shows.
After all, you won’t be paying out for a mortgage, your commuting and your children will – hopefully – be independent.
Fancy something a bit more luxurious? You’ll need £39,000 a year if you’re looking forward to more exotic travel and want a new car every five years.
Will a state pension be enough?
As long as you’ve contributed to national insurance for 30 years in some way and are at the age of retirement, you qualify for the state pension.
Unfortunately, the hard truth is that you can’t rely on the state pension to cover what you need to live comfortably through retirement. If you reached pension age – currently 65 for a man and 64 for a woman – before 6 April 2016, the most you can get is £125.95 a week – that’s around £6,500 a year. If you reached retirement age after 6 April 2016, you should get the new state pension if you have 35 years of NI contributions. This means you’ll get £164.35 a week, but at around £8,500 a year, you still won’t get a lot.
This is why Brits need to supplement the income from their state pension with a defined contribution scheme. This is where you build up your pension pot throughout your working life, often with help from your employer.
The tax benefits to those saving for a pension are generous. You’re able to claim relief relative to how much tax you pay, so if you are a basic rate payer you will pay £8,000 for a £10,000 pension contribution, and a higher rate band will pay just £6,000.
How much do I need to save each month?
Retirement doesn’t come cheap. But the sooner you start saving for your future, the less it impacts your day-to-day living. Even if you can’t meet guidelines set by experts, saving something is better than nothing. The research from Which? makes starting early a no-brainer.
To have a comfortable retirement of £26,000 a year, a couple in their 20s will have to save £131 a month and a couple in their 30s will have to put £198 aside from each pay-cheque. These figures don’t look too scary.
But leave it too late, and the costs stack up. By the time you’ve reached your 40s the amount you need to save each month has jumped to £338, whilst couples in their 50s will be forced to part with £633 each month.
This just proves that if you’re organised from an early age and strict with yourself, saving for your pension doesn’t need to be stressful.
Couples after the retirement highlife need to put away £342 every month in their 20s, £424 a month in their 30s, £731 each month in their 40s, and a whopping £1,657 a month in their 50s.
What’s better: annuity or income drawdown?
Once you’ve built up your savings, the question turns to how you access your pension throughout retirement.
An annuity is where you transfer your pension pot to a provider, who guarantees you a regular income until you die. This will be a percentage of the amount you transfer. For example, if you had £200,000 of savings and are offered an annuity rate of 5%, you will get £10,000 a year.
The remainder of your pension pot will go to your annuity provider when you pass on, unless you’ve chosen a joint-life scheme, where your income will continue to be paid to your partner or spouse until they die.
Annuities are great for those wanting a regular income throughout retirement, but not if you want to leave something for your children.
That’s why income drawdown is also a popular option, especially after recent pension freedoms. As your pension pot stays invested in the market throughout retirement, you draw money out of your savings to use as income after the age of 55, usually for a charge.
Pension freedom changes mean investors can now withdraw 25% of their pension pot upfront free from tax. After that you can decide how you want to access your savings, which will be taxed in line with income tax rates.
If you pass away before the age of 75, your pension pot will be inherited tax-free. After the age of 75 and your pension will be subject to a 45% inheritance tax if taken as a lump sum, or regular income tax rates if drawn-down gradually.
Making sure you plan for retirement in the best way for you and your family can be difficult. If you need any help, talk to an independent financial adviser and be sure to read our pension guide.