5 important pensions issues you need to be aware of as you plan for your retirement

Category: News & United Kingdom

For the last decade, leading pension providers and awareness groups, in association with the Department for Work and Pensions, have worked together to help promote the advantages of saving for your retirement in the UK.

The key focus of this comes during Pension Awareness Week, which this year takes place between 11 and 15 September. 

With that in mind, read about five of the key issues around pensions, and why it’s so important to plan for your retirement years. 

1. Your pension is likely to provide the bulk of your retirement income

You may well have a comfortable life now, based around your accumulated assets and a regular income supporting your lifestyle.

But it’s important to be aware of the future, and what happens when you decide to stop working and no longer have the same regular income to rely on. 

At that time, you will need your accrued pension fund and other accumulated assets to fund your retirement years.

The Office for National Statistics longevity calculator shows that a man aged 50 currently has an average life expectancy of 84 years. For a woman of the same age, the average expectancy is 86 years.  

This means that your retirement could easily last for 20 years or more. 

There is no guarantee that your regular outgoings will automatically decrease when you stop working. This is particularly the case in the early years when you’re still active, and later when care costs may become an issue. 

So, planning for your retirement ought to be one of your highest financial priorities. 

2. Saving into a pension

Research reported by Retirement Living Standards suggests that to enjoy a comfortable retirement in the UK, a single person would need £37,300 a year net annual income. Meanwhile, the average couple would need £54,500 a year. 

Bearing in mind, as you’ve already read, your retirement could easily last more than 20 years, those figures may appear daunting. 

That said, by starting to save immediately, if you aren’t already doing so, and committing to making regular contributions – as well as one-off single payments, if possible – you could end up building a substantial fund. 

There are three key factors that can help you with this:

  • Saving into a pension fund is very tax-efficient, and you’ll receive tax relief at your marginal rate on all your personal contributions up to the Annual Allowance limit.
  • The Annual Allowance means you can contribute up to £60,000 (or 100% of your earnings, whichever is lower) gross each year tax-efficiently. However, if your income is over £200,000 you may be affected by tapering, which can restrict the amount you can tax-efficiently contribute.
  • You could benefit from compounding and dividend payments that will boost the value of your fund over time.

3. How your pension fund is invested

Once you’ve committed to saving into a pension, the next important issue to address is to ensure your money is invested effectively. 

The nature of investment markets, based on economic performance and the success of individual companies and wider market sectors, means that some level of market volatility is inevitable.

Even so, the long-term aspect of saving for your retirement means that such volatility is often smoothed out over an extended period. 

How you invest your pension savings will depend on several factors, including:

  • The period over which your money will stay invested
  • How much risk you’ll be comfortable accepting to meet your financial goals
  • Your capacity for investment loss, particularly as you get closer to the time you want to stop working.  

It’s important to review your investment plans regularly to check that they are still appropriate. This is especially the case as you get closer to retirement. 

You should also bear in mind that you will probably want to continue investing after you’ve retired and started drawing from your fund.

4. Taking advantage of your employer scheme

You’ve already read about how compounding, dividends, tax relief, and long-term investment growth can help drive you towards your target fund value at retirement. 

A further important benefit you should take advantage of as far as possible is your employer pension contributions.

In the UK, all employers are now obliged to provide a pension scheme for their employees and to contribute a minimum of 3% of your annual salary to it. 

Many employers will pay in more than the minimum, and some also run schemes where they will match your personal contributions up to a certain percentage. 

Effectively, this equates to your employer giving you free money, so you should look to take advantage of it as far as possible. Don’t forget you will also receive tax relief on your personal contributions. 

5. Having a plan for your retirement income

As well as having a plan in place to accumulate your pension fund, it’s also important to have an idea of what you want to do once you stop working, so you have time to put together a separate strategy for that. 

When you’re some way off retirement, this only needs to be in outline form. But as you get closer to your planned retirement date, you’ll need to have a clear idea of what you want to do, and the level of income you’ll need to fund it.

You should also consider other possible demands on your retirement savings and plan accordingly. These could include:

  • Outstanding debts, such as your mortgage or other borrowing
  • Providing financial help to your children
  • Elderly relatives who may need financial support.

Another point to be aware of is that your income in retirement does not necessarily have to come exclusively from your accumulated pension fund. 

You can include other assets you may have. Income could come from your UK State Pension, other Guaranteed Pensions, ISAs, shares, and other investments – as well as normal savings. 

Indeed, it is possible to create a highly tax-efficient income by drawing from different sources to maximise the various tax advantages each of them provides. It’s also important to take any pensions and other accumulated assets your spouse or partner may have and include them in your plans. 

A professional financial planner can help ensure you optimise tax-efficient income from all your savings and investments throughout your retirement.

Get in touch

If you’d like to talk about your pension arrangements, or have any queries regarding anything you’ve read here, please get in touch with us. 

Please note

The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of HMRC and ATO legislation, which is subject to change.