Is retirement something you know you should think about but – like the 15 million identified by the Pensions Commission – are vastly underprepared for?
Research by Standard Life shows that many retirees believe modern retirement lasts longer, costs more and is harder to navigate than expected.
There’s a lot of focus on saving into a pension during working life but less attention on what to do with the savings once you get there. The insurance company found that around 30% of private pension pots are accessed at the earliest possible opportunity, with around half withdrawn in full. Nearly half of this money is spent on large expenses such as cars, holidays or home improvements, raising concerns that some people may be drawing on retirement savings too quickly without fully considering their longer-term needs.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Add to that the fact that less than 9% of Brits have a financial adviser, meaning many of you are likely fending for yourselves. Standard Life’s research found 17% of retirees underestimated how much money they’d need in retirement, while 16% admit they had not expected retirement to last as long as it has.
Latest Videos FromMoneyWeek
To counter these feelings of regret – or rather, feeling the acute benefit of hindsight – it’s sensible to plan earlier.
We asked two Chartered financial planners about some of the key questions to ask yourself when planning for retirement.
1. What does retirement actually mean to you?
Retirement once upon a time used to be a drastic, immediate change in status from ‘working’, to ‘not working’. Huge numbers of the population had worked one, maybe two, jobs their whole life. They typically retired at a predetermined age. It could take some getting used to.
Today, it can be a more gradual transition, inviting questions such as whether you want to stop work altogether or reduce hours, or what an ideal week would look like if you took phased retirement.
What are your objectives? Often plans involve more travel, house or garden renovations and finding ways to spend all that newfound free time. It’s also important to think further ahead; about security, flexibility or any legacy planning.
Estimates range from outgoings in retirement being 60%-80% of outgoings during working life but Roger Clarke, Chartered financial planner at The Private Office (TPO), said to beware blunt calculations.
“Many of these estimates can be quite crude. You may no longer have to buy a season ticket, expensive sandwiches or suits for work, but for some their expenditure will increase because they think, ‘right, I've retired, now I want to do all the travelling I've ever wanted and buy myself a nice car’.”
2. Do you know where your retirement assets are, where they’re invested and how to access them?
This is about taking stock – and doing so early.
First, think about your state pension entitlement. Megan Rimmer, Chartered financial planner at Quilter Cheviot Financial Planning, said a couple’s combined entitlement could exceed £25,000 a year, significantly covering many basic expenses. But she warned to check early whether you’re on track for full entitlement, as some people – more likely women – may not have the full qualifying years. In these cases, if you’re still working you can pay NIC3s or make additional voluntary contributions (AVCs) to make up any shortfall.
Possibly the more laborious task is taking stock of any personal or workplace pensions. According to LV, the average British worker changes jobs every five years and will have between nine and 12 jobs during their lifetime.
This means keeping on top of admin will be ever more important. Do you have final salary scheme pensions (defined benefit, or DB) or defined contributions (DC)? Where are your personal pensions?
Rimmer said: “The first thing I’d do is identify the assets that I have, where are my pensions, and what are they invested in? So many people have got pots here, there and everywhere, and they don’t know what their value is or what they’re invested in.
“They also don’t always know how they can take those benefits. A modern pension scheme typically offers full flexibility – you can draw a flexible income or purchase a guaranteed income, or annuity – but some older pension schemes don’t offer that, which is important to know.”
Describing final salary schemes as like “gold dust”, Clarke added: “It’s important to not lose track of those, because you know they can easily disappear into the ether if you’re not careful.”
Your scheme administrator should keep you informed, so if you’ve not heard from them for a while, it’s probably worth getting in touch.
Around 3.3 million pots are estimated lost, worth a combined £31.1 billion, with failure to update contact details among the top reasons. The government offers a pensions tracing service, which might be a useful resource if you think you have an outstanding pension from a previous job that you’ve lost track of.
3. Will you be able to afford the lifestyle you want in retirement?
This is where budgeting is crucial if you want to maintain a similar lifestyle.
Rimmer said to categorise expenditure into three headings: basic, discretionary and holidays. Basic covers all the essentials: household bills, mortgage and food. Discretionary is the fun stuff: clothes, eating out and leisure activities. She advises mapping out holidays separately, covering big annual spend and smaller weekends throughout the year.
Clarke said at TPO they refer to the ‘smile’ model of retirement expenditure, with more discretionary spend in the early years of retirement, which then tails off slightly before potentially picking up again if long-term care costs become necessary.
It’s important to ask not ‘how big is my pension pot?’, but ‘what level of income will support the life I want?’
Using a cashflow planning tool, ideally five to seven years out from retirement age, can help model various scenarios and identify any potential shortfalls.
4. Are all your savings and investment pots structured in their most tax-efficient way?
Pension contributions are one of the most tax-advantageous investment tools you can currently make. This is especially true for higher-rate taxpayers, company directors and limited company owners.
The Pensions Commission report, out earlier this month, revealed that just 4% of self-employed people were saving for retirement.
While pensions can make more of long-term growth and tax relief, the flexibility and tax-free access of ISAs are their main plus points.
“Pension contributions are particularly attractive if you’re a higher-rate taxpayer because most people, whether they’ve got a personal or a workplace pension plan, they’re paying in and getting relief at the higher rate.
“But then when they retire, in most cases they’ll go from being a higher-rate taxpayer to a basic-rate taxpayer,” Clarke said.
For business owners, he believed there’s no more tax-efficient way of getting money out of the company than to pay employer pension contributions.
5. When should I start thinking about retirement?
There are different facets to ‘thinking about retirement’.
While it’s advisable to start saving for retirement as early as possible, to allow your investments to benefit from more time in the market and compounding, when it comes to the more detailed planning aspects described above, Rimmer said many people start to give it serious thought in their 40s.
They’re likely earning more, their kids may be a little older, school fees may be behind them, a deposit was saved and mortgage payments are underway.
Plus, if you take the State Pension age as 67 or 68, then to start thinking about it 20-25 years out feels near enough to be relevant, while allowing plenty of time to get organised.
In terms of reviewing your investments, both advisers suggest at least five to seven years out from the age you hope to retire. This allows time to understand if you’re on track to meet your objectives and if not, allow time for any adjustments. These might include saving more, taking more risk to increase your potential returns or restructuring any investments into more tax-efficient accounts.
