The latest life expectancy figures published by the Office of National Statistics highlight the increasing need for people to focus on their retirement planning.
Patrick Connolly, Chartered Financial Planner at Chase de Vere, considers 9 questions which people should ask themselves:
Should you be saving money now?
The biggest challenge is getting people to understand that they need to do something. Many people see retirement as a long way off and are more focused on shorter-term priorities such as buying a house or paying for next year’s holiday. The result is that those who do save for retirement often leave it too late. Although it may seem like a long way off, the sooner you start saving the easier it is to give yourself a more comfortable lifestyle in retirement.
The following table looks at how much you need to invest to generate a pension fund of £500,000 million at age 65, assuming investment growth of 6% per annum after charges.
This assumes level premiums and doesn’t take account of inflation (which is effectively the same as assuming contributions rise by inflation as does the £500,000 target amount).
|Age started investing into pension||Monthly contribution to reach £500,000 million at age 65|
Do you have access to a company pension scheme?
Most company schemes are good value, especially if your employer also contributes on your behalf, as all employers need to do as auto enrolment is fully rolled out
Find out if your employer will put more money into your pension if you increase the amount you are investing and also if you can use salary sacrifice (salary exchange) where you give up part of my salary in exchange for pension contributions. This can result in tax savings for employees and employers
Are you invested in the most appropriate funds?
When you are younger and have a long period until your retirement date you can afford to take more risk with your investments, especially if you’re investing monthly amounts. Investing in shares is likely to give you the best long term returns, although as your pension fund gets bigger and as you get closer to retirement you should hold more money in other assets such as cash, fixed interest and property, as capital protection should become as important as capital growth.
The funds which you invest in can have a huge difference on the final value of your pension fund.
The following table looks at the pension fund value at age 65 of people who start investing £100 gross each month at age 25, assuming different levels of investment growth.
|Investment growth per annum (after charges)||Pension fund value at age 65|
Are you paying too much in charges?
Find out how much you are paying in charges, because if you’re paying too much then these higher charges will be eating away at the value of your pension fund. In particular, many older pension policies have higher charges and if you’re invested via a platform make sure you understand the charges made by both your investment funds and your platform provider.
The following table looks at the pension fund value at age 65 of people who start investing £100 gross each month at age 25, where their investment funds grew by 7% per annum before charges.
|Pension charges per annum||Pension fund value at age 65|
How much is your pension likely to provide for you?
Collate information on your pensions and make sure you understand how much they are worth and the benefits they are projected to provide for you; make sure you also take account of the effects of inflation. Also find out and include your likely entitlement to the State pension. From this you can work out how much you might get in retirement and when. This could be the spur to invest more if you aren’t on track to achieve the standard of living that you want in retirement
How are you planning to take your pension benefits?
You also need to give some thought as to how you’re going to generate an income in retirement. Pension freedom rules mean that many people won’t simply buy an annuity with their pension pot. However, this is likely to mean that your income won’t be guaranteed and you’ll be taking greater risks. If you are nearing your planned retirement age you need to understand your options.
Should you also consider ISAs?
For most people the best approach for long-term savings is a combination of pensions and ISAs. Pensions provide initial tax relief which give your savings an immediate uplift but they are quite inflexible for younger people, whereas ISAs can still be tax efficient and you are able to access your money whenever you like. Make sure you’ve got the right balance between the two to suit your requirements
Do you regularly review your investments?
It is important that you review your pensions, ISAs and other assets you’ll be relying upon in retirement on a regular basis. Put in place plans to review your pensions every six months, or at least annually. This way you can keep on top of how they’re performing and whether you need to make any changes to reach your retirement targets.
Should you be taking independent financial advice?
Many people should take independent financial advice. Retirement planning can be complex and the pension rules mean that people have a great amount of choice when it comes to taking their pension benefits. Getting it wrong could have a huge impact on your standard of living, so it’s important to make sure you’re on track to achieve your retirement goals and independent financial advice can help you do this.