Recently, we looked at how pension flexibility allows you to use your pension “like a bank account” once you reach the minimum age.
For those of you who are not yet at retirement, may have questions about pensions and what you need to consider when planning for the longest holiday of your life – retirement. Here are our top 5 things to think about when organising your pension.
1. How Much You Need to Live
It has been estimated that the average person will need at least £9,500 per year to live on in retirement, or £13,700 per year for a couple. A lot of people may need more than this, as this estimate does not include expenses such as cars, holidays, additional bills, etc. This estimate also assumes you have fully paid off your mortgage and any other debts. Each person’s budget needs will vary, so it’s important to work out your own estimate.
Once you have a figure in mind, you can then plan towards a target fund size. As a rule of thumb, we recommend that you take up to 5% per year of the pension value as income. For example, if you plan to live on £10,000 per year in retirement, you will need a £200,000 pension fund. Remember that inflation will reduce the buying power of money in the future, so it may be that your pension fund is worth less when you come to retire.
2. Investment risk and opportunity
You can chose the funds which your pension is invested in and these range from very low to high risk and everything in between (you can also switch funds at any time). This is very much down to personal preference of course. Some people are naturally very cautious, whereas others are prepared to take a bit of gamble in the hope of better returns. Having said this, in most cases your pension will be invested for several decades before you draw it.
If you are more than ten years away from retiring you might want to consider at least some stocks and shares investments, as this generally has more potential to grow your money than more cautious investments over a longer period. On the other hand, if you are less than ten years from retiring, you may choose to be a little more careful.
3. Spreading Your Pension
It is not always wise to put “all your eggs in one basket”, especially when it comes to pensions and other investments. Spreading your pension over several funds reduces the risk. Also, some markets do well when others are falling. A good example is “gilts”, which are loans to the UK government. Historically, when the stock-market falls, gilts tend to go up in value. Therefore, by keeping a portion in relatively lower risk gilts, this complements stock-market investments by reducing the overall level of risk which you are taking.
4. Keeping Everything "Under One Roof”
As most people change jobs several times during their career, they often end up with several pensions, one for each company they have worked for. This makes it difficult to keep track of how much you have already saved, and you will likely receive a lot of paperwork, including several annual pension statements at different times of the year.
Thankfully you can tidy them up by consolidating your pensions, ideally leaving you with just one pension so you can see at a glance how much your pension savings are worth. Before transferring any of your pensions there are several potential pitfalls to be aware of. These are:
- Guarantees under your existing contracts (e.g. guaranteed growth rates, guaranteed annuity rates).
- A transfer penalty if you transfer before a certain date
- A Tax Free Cash entitlement of more than 25% of the fund value
- It is rarely in your interests to transfer out of a “final salary” or “career average” pension scheme.
You also need to compare the charges under your old plans to the plan which you transferring into.
5. Regular Reviews
You should regularly review your pension funds, to monitor how on-track you are to meeting your retirement goals, how the funds are performing and whether you should decrease or increase your contributions.
Article by Daniel Cook, Adviser Support for Charles James Financial Planning Ltd which is authorised and regulated by the Financial Conduct Authority