With people living longer, being more active and having more options than ever before, retirement planning can be overwhelming, confusing and one of those things that
In the olddays, many people stayed in the same job for 30 years, retired and thenreceived a company pension – plus if they’d paid enough National Insurance Contributionsa state pension too.
It’s notlike that now. Someone staying with the same employer for their whole career ispractically unheard of, unless they work for the NHS or civil service. Peoplechange companies for better pay and opportunities, and it’s not unheard of forpeople to change careers entirely.
And because people are retraining to do their dream job, and then working until they are older – retirement these days is for many people simply the time when they want to work less hard rather than stop work completely. With this in mind – there are 3 common mistakes that you should avoid when looking at planning your later life income.
1. Relying on your state pension
Over thelast few years the State retirement Age (SRA) has been raised to 67, and iscreeping upwards. Those of us born after 1970 are likely to be 68 before we candraw our State Retirement Pension (SRP) and although we know that at today’srates it’s worth about £8546 per year, there is no guarantee that any futuregovernment will continue to increase the amount payable year on year, or willbe able to afford to if age expectancy continues to rise.
To get afull SRP you will need 35 years of National Insurance contributions. You canalso check your NI record on the gov.uk website to check that you will have therequired years. If you are employed by your own Ltd company on a low salary(plus dividends) and don’t pay National Insurance Contributions then you may havegaps for those years, unless you choose to make up the contributionsvoluntarily or are receiving NI credits because you claim child benefit for achild under 12.
You can check what level of SRP you’re likely to get by getting a State Pension Forecast though the Gov.UK gateway. But, even if you do qualify for a full SRP – what sort of quality of life would you have on £712 a month? You’ll need a way to top up this income if you don’t want to have to work forever.
2. Putting all your retirement savings in a pension
Don’t get mewrong, pensions are an excellent way to save for retirement. And for mostpeople they are a good term strategy, their savings safely tucked away untilretirement, but they are not the onlyway to save for retirement.
The best bitabout pensions is that you get tax-relief on the contributions,effectively FREE money from HMRC.
The tax relief means that as a basicrate tax payer (typically earning less than £50k per year) for every £100 youcontribute, HMRC gives you another £25 and a total of £125 goes into yourchosen fund.
Higher ratetax payers get more, usually by adjustment of their tax code, or claimed byself-assessment.
The downsideis that you can’t take the money back out until you are 55 or older – don’tbelieve scams that try to tell you otherwise – and although you usually get 25%of the pot tax free – you pay tax on the rest of the money as you withdraw it,at whatever rate of tax you pay at the time.
So you can’t use this to supplement your income if you decide to work less hard before the age of 55.
Other thingsthat can be used to supplement your income are ISAs, rental property orbusiness income (from a business that you own / control, but have peoplerunning for you). So it may be that a combination approach is needed to ensureyou have the right money in the right place at the right time and that youdon’t pay more tax on your income than you should.
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3. Not keeping track of your investments
If you’vechanged jobs more than once, you could have a myriad of pensions dotted aboutall over the place and it can be really hard to keep track of them all.
Even if youonly have a single pension, the likelihood is that although you may open theannual statement to look at the pot value, it will then get consigned to adrawer, or however you store paperwork at home.
When was thelast time you worked out how much your pot would be worth at retirement, and ifthat would be enough to live on? You need to factor in growth of theinvestments, plan charges and inflation to get an accurate figure.
This can be tricky and although there are tools online that can help you do this, most people who regularly do financial forecasting do it with the help of their financial adviser or money coach. Because of the way that compound interest works, the earlier you start to save for retirement the better (in whichever savings vehicle/wrapper you choose) as your money has longer to grow, and as the dividends are re-invested your pot will get growth on these too. This means that for every 10 years you wait, you need to increase your contribution by 50% to reach the same endpoint.
Keep aregular eye on your retirement savings, and ask your financial adviser ifconsolidating your pensions might make them easier to monitor going forward.
If you havequestions about any of this and need some more pointers, why not book a FREE discovery call so that we can chat about ways thatwe can help you get on top of your money?
