Putting together a realistic and manageable plan for your finances in retirement is never easy. Here we outline six things to consider, whether you have decades or years to go until you give up work.
Should I plan now for my retirement?
The sooner you start planning for your retirement, the more prepared you could be for your later years. In putting more money aside earlier in life, your pot may benefit more from investment growth and compounding, which could ultimately mean a more comfortable retirement.
As financial planner, Holly Graham, discussed in our recent podcast - Your pensions and retirement health check, procrastination could be the difference between the life you want and the life you actually achieve. It's never too late, or early, to work on your plan. With that in mind, here’s some steps to consider when laying the foundations for your future.
1. Trace your pensions and understand where you are invested
Getting your plan in order does not necessarily mean immediately opening new pensions. The first step is to understand what you may already have, which is especially true of workplace pensions. It’s rare these days for us to go through our working lives with just one employer, meaning most of us will likely have multiple workplace pensions.
All employers must offer a pension to their staff aged 22 and over and under state pension age, with a percentage of your pay automatically added to the pot every payday. Most companies will also contribute to their employees’ pensions either matching or bettering their contributions. If you are self-employed, you would have likely set up a personal pension or Self-Invested Personal Pension (SIPP) as your pot.
It’s very easy to lose track of different schemes throughout your career, in which case you may find our guide to tracing, and potentially consolidating and transferring your pensions useful. We’ll cover these options in more detail later.
Once you have up-to-date statements for any workplace, as well as person pensions, you have, you can get a clear picture about the overall size of your pot and where it is invested. At the very least, you should make sure that the risk level on each pension (which determines how and where it is invested) matches your current circumstances and your future aspirations.
2. Decide when you can retire, and determine how much you will need
For most personal and workplace pensions, you will not be able to access your pot until 55, rising to 57 in 2028. For the new State Pension (for men born on or after 6 April 1951, or a woman born on or after 6 April 1953), you will not be able to access this until at least 66.
Those planning to retire earlier will need to rely on other sources of income, potentially including investment ISAs, though these tax-efficient wrappers can also supplement your pension provision. A Lifetime ISA can also be a great way of investing towards your retirement for those who are eligible, with the benefit of an additional 25% government bonus. However, if used for this purpose the money can only be accessed from the age of 60.
Determining how much you will realistically need to fund your retirement depends on the individual. Do you plan to spend your post-work years travelling the world on expensive cruises, or do you have more modest ambitions?
It may be useful to seek financial advice to help you set your plan. Nutmeg’s pension calculator can help you get a rough figure, though this is no substitute for speaking with a professional. You can book a call with one of our experts if you wish to discuss your options, including paid for financial advice.
3. Align your pension with your goals
As mentioned earlier, it’s important to understand where your various pension pots may be invested. This is not necessarily about taking a deep dive into individual stocks, as most pension schemes will instead invest across various collectives – funds or risk-rated multi-asset portfolios, such as those offered by us.
However, you should have an idea how much risk your pension is taking and understand where this fits with your current circumstances. For example, if you are young enough to have multiple decades to go until retirement, it may make sense to invest at a higher risk level, most likely with a greater weighting to equities rather than bonds.
However, if you are just a few years from retirement, it is likely you would want to dial this risk down. As such, you may have a greater allocation to traditionally more secure assets such as government bonds – though returns are never guaranteed on any investments. You may also be more focused on income-generating investments rather than growth assets.
Aligning your pensions with your goals is also about understanding what contributions you need to make, how much and when. As discussed in point two, if you have a robust plan in place this can give you more freedom; you may decide to adjust your contributions, depending on your personal circumstances at any stage.
4. Access your options – can you consolidate?
Pension consolidation means transferring your different pots together in to one single scheme. As discussed earlier, you may have multiple workplace pension pots, so it could be a good idea to consolidate these together into one single pot that can be managed in one place.
This can mean less admin, getting a clearer idea of how much money you have, and greater control over its risk level. Consolidation can also mean potentially better value for you if you can reduce management fees.
The good news is that most pension schemes will allow you to transfer your pension pot to another scheme or to a new provider of a personal pension. However, before you transfer be sure you check that there aren’t any specific benefits with your pension, such as life cover, that you would lose if you transfer to a new scheme. You also need to ask if there are fees for moving your pension.
5. Understand and maximise tax efficiencies
Pensions can be a tax-efficient way of investing for your retirement, with tax relief giving you a potential sizeable bonus to your contributions.
Basic tax relief – at 20% – may be paid at source by your pension provider, such as Nutmeg, but if you are a higher-rate or additional-rate taxpayer then this amount could rise to 40% or 45%. However, this is something you may need to organise via a self assessment.
As we explore in our recent article ‘Understanding tax relief’, knowing the rules about how much you can contribute to a pension while benefiting from this perk (usually £60,000 or 100% of your annual salary, whichever is lower) is certainly worthwhile.
The experts at Nutmeg can help outline the options for you, though you may wish to seek a specialist tax adviser.
6. Finalise a plan and stick to it – do you need advice?
If you’ve made progress with all our tips so far, then congratulations you are hopefully in a good place to understand what pension provision you have and possess a clearer idea of when you might want to access it.
However, consider also how you may want to access your money in retirement. A relaxation of pension freedoms in 2015 has really opened up the landscape for retirees who now have a choice of whether or not to take a tax-free lump sum from their pension on retirement.
On retirement, pensioners now have the choice of flexible-access drawdown, to buy an annuity, take small lump sums as cash, take the whole pension as cash (usually subject to tax), or combine one or more of these options.
Financial advice may help you make these important decisions, but talking to a professional about your pension is not just for those looking at drawdown. Whatever your stage in the planning journey, talking to a professional can help you get closer to that real retirement bliss!
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. Please note that during any transfer, your investments will be out of the market. If you are unsure if a pension is right for you, please seek financial advice.
A stocks and shares Lifetime ISA may not be right for everyone and tax rules may change in the future. You must be 18–39 years old to open one. If you need to withdraw the money before you’re 60, and it’s not for the purchase of a first home up to £450,000, or a terminal illness, you’ll pay a 25% government penalty. So you may get back less than you put in. Compared to a pension, the Lifetime ISA is treated differently for tax purposes. You may be better off contributing to a pension. If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you may lose the benefits of the employer-matched contributions. If you are unsure if a Lifetime ISA is the right choice for you, please seek financial advice.