Read between the lines: pensions and retirement

Each month we will be bringing you a regular column from Simon Read, a personal finance expert with extensive experience in helping people make the most of their money. In his last piece, Simon looked at the impact of making small savings each month.

Do you know when you’re going to retire? It may seem a long way off, but if you don’t get your finances in order, it’ll be even further away. Why? Because if you don’t have a decent nest-egg to draw on, you won’t be heading for a happy retirement – just a struggling one.

And if you think you can rely on the state to support you when you give up working, think again. At present the state pension payout is just £159.55 a week. That works out at £8,296.60 a year.

Do you think you could survive on that when you retire? Some people have to, but you won’t if you save some extra cash to see you into a reasonably wealthy retirement.

Before I suggest some ways to do that, it’s also worth pointing out that the state retirement payout age is rising. What age do you think you will qualify, bearing in mind that the age is now the same for men and women?

Yes, it did use to be 65 for men and 60 for women but that’s changed. If you’re not due to retire before November next year the qualifying age will be 65 for both genders.

By October 2020 the age climbs to 66 and it rises again to 67 by 2028, that will hit anyone who is 56 or older already.

For younger folk the age is likely to climb again to 68 from 2037 – which means anyone born after 1969 will have to wait an extra year for the state pension. And there will be continual rises in the future which could mean your kids will have to wait until age 70 or older to qualify.

What that process underlines is that it’s up to you to ensure you have enough money in retirement to ensure a decent quality of living. How you do that is up to you. But don’t be put off by the word ‘pension’ – it’s simply a savings scheme with a specific purpose, to give you some cash when you get older and stop working.

You don’t have to save for retirement into a traditional pension scheme. Indeed if you want some flexibility about when you retire there’s an argument for saving elsewhere. In fact many people fed up with the returns from traditional pension managers prefer to invest their retirement cash themselves, whether that’s in stocks and shares, property, peer-to-peer or other type of opportunity.

Saying that, if you work for a company, it has to offer you a workplace pension and that is almost certainly worth using. That’s because many companies match your own contributions as well as there being tax relief on every pound you put in. So if you’re a 40% taxpayer, your pound is matched by your company and taking account of the tax benefit, every pound is immediately worth £2.40 to your pot.

But even though that sounds great, you should be planning other ways to build up your retirement pot. Think about it this way: how much do you want to live on when you give up work? Would £30,000 do?

Earlier this year, consultants at Hymans Robertson worked out how much you’d need to save a month to achieve that target. Because of the earnings you make from compound interest, the amount climbs dramatically the older you are when you start saving.

The actuaries reckoned a 25-year-old would need to save £342 a month, while a 35-year-old would need to stash away more than £500. If you’re 45 and haven’t started saving for retirement, your figure would be more than £1,000 a month.

Sobering, isn’t it? The simple truth is that the sooner you start planning for your retirement, the better life you’ll be able to have when you give up work.

Your pensions planning checklist:

1 – Pick the age you’d like to retire

2 – Plan how much you’d like to live on when you retire

3 – Work out how much you need to save per month

• Check your state pension age, but remember this may change if you are still young
• If you have a company pension, find out what their contribution is and how it is managed
• Use a pensions calculator to see what savings you need to make
• If you need a boost, look at your investment options, and how much interest you could earn

Other resources:

• How to check your state pensions age – https://www.gov.uk/state-pension-age
• When can I afford to retire? https://www.moneyadviceservice.org.uk/en/articles/when-can-i-afford-to-retire
• Key points you need to know about pensions https://www.moneysavingexpert.com/savings/discount-pensions

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