Saving for your pension - your guide to a comfortable retirement 

Retirement is a new chapter in life where with the freedom to expand our horizons and embrace life without the obligation of work.

A question for many to consider is how much we’ll exactly need for a comfortable retirement. Without work comes the drop of income and it’s important to ensure your pension will be enough to fund the lifestyle you want to live.

The Pensions and Lifetime Savings Association recently conducted research which found that 80% of us aren’t confident we’re saving the right amount for retirement, which equates to 30.4 million people who are at risk of not achieving the retirement they want and potentially face a drop in living standards.

The (ONS) report that the average life expectancy for men is 79.2 years and women, 82.9 years and this is only increasing. By the average retirement age of 65 we can expect close to two decades of post-work life to embrace, meaning its more important than ever to have a healthy pension in place.

What is a pension?

First things first, a pension is a way of saving up for retirement. A pension pot is a lump of cash which you pay towards throughout your working life which can also be contributed to by the government and your employer. You can withdraw this money at age 55 and purchase an annuity which guarantees regular income for life.

What are annuities?

Annuities are purchased with your pension pot and in return provide you with an income throughout your retirement. There is a wide range of annuities to choose from, see below some of your options:

Lifetime annuity

A lifetime annuity guarantees you a regular income for life. – they’re one of the most common types of annuity.

Enhanced annuity

This option is for those with a medical condition that may mean they die earlier. Considering the holder won’t potentially live as long an enhanced annuity will provide a higher income which is dependent on the holder’s health.

Investment linked annuity

This annuity allows you to have part of your income guaranteed while the other part is linked to the performance of investments.

Income drawdown

Alternative to an annuity there is another option of  income drawdown. Rather than using your retirement savings to purchase an income, your pension pot invested is left in a fund of your choosing, which you can take money directly from.

How much do you need to save in retirement?

It can be difficult to estimate how much you’ll need for your retirement since everyone’s different. There’s a misconception that you’ll need as much as your current wage, it’s typically half to two-thirds since you won’t require many of your day-to-day expenses such as work travel, a mortgage and many retirees will now be ‘empty nesters’ with children grown up and no longer needing to pay the associated expenses.

The Office of National Statistics explains that the average retired households spend £21,770 per year. By using a model that predicts the investment return over the lifetime of a pension the BBC found that by the age of 25 you will need to be putting away £246 each month which equates to 14% of your salary if you’re earning the national average of £26,364.  This grows to £404 by 35 and peaks at £826 a month by 45.

"Twenty thousand pounds on average national earnings is quite an ambitious target" Patrick Bloomfield, a partner at Hymans Robertson LLP explains to the BBC.

He continues, ‘The challenge is, when they're in their 20s and 30s people are trying to save, they're trying to get on the housing ladder, they're being young and having fun. There are lots of calls on that money.’

Of course, everyone is different and your pension will vary on the lifestyle you want to lead. There’s not a set amount to how much you should aim to get, it’s up to you to forecast this. A commonly followed rule of thumb is that you should pay in half your age as a percentage of your salary (12% at 24 for instance). There’s lots of different ways to go about your pension, but it’s sensible to consider investing as much as you can afford as early as you can.

Tax and your pension

Annual tax relief allowances are currently capped at £40,000. If you exceed this allowance you won’t receive any tax relief on the contributions you made and you’ll also need to pay an annual allowance charge.

When it comes to withdrawing your pension, 25% will be tax free while the other part will be taxed as if it was normal income.

Other ways to save

Investing for your retirement doesn’t have to be through your pension. Once you’ve capitalised on your employer’s contribution matching the only other benefit of a pension is that your payments will receive tax relief.

Below are some alternative ways of saving to consider:

Lisa

Lifetime ISAs are available to over 18s and under 40s, offering a tax-free investment of £4,000 per year up until you’re 50. The government will add a 25% bonus to your savings which is up to a maximum of £1,000 per year.  You can withdraw the money when you’re 60 or over. Note that this is only available to UK residents and counts towards your ISA limits – for more information about lifetime ISAs visit the Government’s site.

Self-invested personal pension (SIPP)

A SIPP is a pension plan which allows you to decide and manage the investments made. This is a great option if you want to make your own investments although leaves you open to the risk of investments falling in value. SIPPs work in a similar way to traditional pensions and the government pays a 20% tax relief if you are a basic rate taxpayer, 40% for higher rate taxpayers and 45% for additional rate taxpayers.

Buy-to-let

We’ve all heard the expression, ‘my property is my pension’ and it’s a compelling concept. Brits have long been in love with the idea of owning another property, but it’s not without its risk and a mortgage leaves you at the mercy of interest rates which may be negligible in the short-term but in the long-term can have a significant impact. If you’re considering this income stream, read our guide on buy-to-let for more information.

Contribution matching

If you’re part of a workplace pension scheme, your employers are required to contribute to your pension pot. The government will also contribute to your pension in the form of tax relief. While employers are obliged to automatically enrol you, they are not eligible to contribution matching  if you earn £503 a month of less.

The minimum your employer contributes is 2% where you would pay 3% of your pay to reach the total minimum pension contribution of 5%. However, these amounts can vary depending on your pension scheme.

For more information on workplace pensions, read the government’s guidelines.

Keeping healthy

Finance is only one of the many factors that helps you achieve a happy retirement. The best retirement plans involve not only your finances, but your health too. It’s essential to look after your psychological and physical wellbeing in order to embrace your post-work life to the full.

Stay sharp

The sudden lack of social and intellectual stimulation from work can have negative effects on your cognition, with studies suggesting it’s detrimental to your brain. Like your muscles it’s crucial to keep your brain active, as Professor Cary Cooper explains to the Telegraph, "we know the more cognitively active you are the more it offsets the risk of dementia.” Keeping your brain healthy goes hand-in-hand with physical fitness and hitting the gym has been shown to reduce the risk of cognitive decline. Additionally, striving to continue to learn through reading and challenging yourself will stimulate communication amongst brain cells and maintain a healthy cognitive function.

Get Active

As we age we lose bone density and muscle mass. This could cause osteoporosis and arthritis later down the line which can really inhibit your quality of life. A mixture of cardio and weight-training is the best defense to keep your strong and healthy!

Retirement is often coined as your golden years for a reason and it’s a time of life you can spend on you. With life expectancies continuing to increase, your post-work years make a substantial part of your life, it’s a time to embrace life and have new adventures. By keeping your finances in check and maintaining your health you’ll set yourself up to make the most of this exciting period.

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