Countless people approach retirement unaware of what pension benefits they have accrued and the level of income this will provide. Some will have a defined benefit pension, where they are guaranteed a certain level of income for life, usually based on their salary and years of service. These benefits are provided by their employer but are becoming increasingly rare due to the high costs to the employer. More common now are defined contribution pensions, which are primarily funded by the employee. For these types of plans, the pension you will receive is determined by the pot of money that has built up through contributions and investment performance. One popular option at retirement for defined contribution pensions is to purchase an annuity with this pot of money, which will typically provide a fixed income for life.
To give you an idea of how this might look, based on current rates, if you wanted to retire at age 65 with an annual income of £20,000 for life, your pension would have to be worth approximately £310,000. For many people, this can be quite surprising, but it should hopefully show the importance of planning suitably for your retirement.
Here are 3 tips to get you on the right retirement path:
- Start saving early. Saving for a pension should begin as early as possible, as this will give you more time to take advantage of compound interest and create a larger pot of money when you come to retire.
- Consider additional contributions. If you are able, you may wish to consider making additional lump sum contributions to your pension or increasing the amount you save each month.
- Seek professional advice. Pension advice can be complex and it is important to get advice tailored to your individual needs and circumstances. Consider consulting an independent financial adviser or using a comparison website to get the best advice.
“The best time to plant a tree was 20 years ago. The second-best time is now.”
It is never too late to start saving or managing your existing assets better. If you are reading this feeling uneasy that you didn’t take charge of your savings or pension sooner, you will not be alone. Many people believe it is too late to save but there are many financial services and tax-efficient ways to help with this. Doing something to address this now is still preferable to ignoring the situation. Five years may sound like a long time, but you can probably remember an event from your past from years ago that feels like only yesterday. Take control of your money today and it won’t take long for you to replace that feeling of unease with one of satisfaction.