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How to plan a comfortable retirement

Rob Morgan
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The subject of retirement is commonly seen as complicated, but a few small steps can help you formulate a plan. (Source: Getty)

Saving for retirement is essential if you want to fully enjoy your later years, but how do you assess how much income you will need? Plus how much do you need to save to reach your goals?

For many people retirement seems a long way off and saving into a pension isn’t always seen as a top priority. After day-to-day living expenses, and other needs such as buying a house, it can be hard to put money aside. Yet the earlier you start the easier it will be. If you have less time to invest then the amount of money that you have to save is likely to be higher. Fortunately, a few small steps can help you formulate a plan.

Assess your needs

Everyone wants different things from retirement. However, most people want to maintain their standard of living. This typically means requiring less income than during your working life because you are no longer spending money on paying your mortgage or raising children. You also won’t be saving towards retirement. One rule of thumb is that around half to two-thirds of the income you had during your working life is sufficient and a reasonable goal.

Find out how much income you could get from the State Pension and any ‘defined benefit’ schemes

Some of your retirement income requirements may be covered by your State Pension, though how much depends on the number of years you have worked and paid full National Insurance (NI) contributions.

The State Pension changed in April 2016 with the earnings-related part of the old system applied to employed people called the Additional State Pension abolished. The new State Pension is based on your NI record alone. For the current tax year, 2017/2018, the full state pension is £159.55 a week (or £8,297 a year). However, you may get more than this if you have built up entitlement to additional state pension under the old system – or less than this if you were ‘contracted out’ of the additional state pension. You can get a State Pension forecast telling you how much you can expect and from what age here.

You should also take account of any income payable to you from ‘defined benefit’ pensions, such as a final salary schemes. These are pensions where the amount of income you are paid is based on how many years you’ve worked for your employer and the salary you earned. Defined benefits schemes were once commonplace, and for some people a combination of these and the State Pension will be sufficient to meet much, if not all, of their retirement income needs. However, few are open to new members today, and people are increasingly reliant on ‘defined contribution’ schemes such as personal pensions to fund retirement. You should receive an annual statement from the trustees of the defined benefits scheme, and you can obtain an estimate of the pension you might receive by writing to the trustees at the address given in the statement.

Use a pension ‘calculator’ to determine how much you need to save.

Having accounted for the State Pension and any defined benefit scheme pension, you need to calculate how much money you will need to save to produce the remainder of your target income. This can depend on factors such as the age you want to retire, income yields available on investments, how much prices rise during your retirement and how long you live for – so it’s hard to make a precise prediction. Of course it also hinges on how much you have put aside already.

Online calculators such as this one can help you see if you are on target to meet your retirement objectives taking into account your current retirement savings and future contributions into defined contribution pensions. It works out how much you might accumulate given current levels of saving, as well as the effects of increasing or decreasing contributions. Calculators have to make a number of assumptions about various factors – so what actually happens could be significantly different – but they do at least give you an idea of what to expect.

The contribution levels produced by the calculator might seem large but with the assistance of any employer contributions the amount you need to save may be much lower. In addition, when investing through a pension you may also receive tax relief on your contributions. These factors often make pension the most effective means of saving for retirement.

Currently, an investor can receive up to 45% tax relief when they make a contribution to a personal pension, with 20% paid by the HMRC to the pension and any higher and additional rate tax relief reclaimable. For example, an investor contributes £8,000 into their SIPP and £2,000 is claimed back from HMRC by the pension provider. A higher rate tax payer could claim back up to a further 20%, reducing the overall cost of the contribution to as little as £6,000. Additional rate tax payers could claim back up to a further 25% making the cost of a £10,000 contribution just £5,500.

This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. The taxation of pensions depends on individual circumstances and is subject to change in the future. If you are unsure of the suitability of your investment please seek professional advice.

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