Retirement is a time when you go through a lot of changes. You aren’t working anymore, so you have more time on your hands for a start. Also, unfortunately, your health may start to decline. As you get older, you may be considering the various things you need to plan for, such as taking out life insurance. But one vital thing to consider is retirement planning.
Having effective retirement planning in place is important if you want to enjoy a good quality of life post retirement. Having a pension and other financial options available will ensure you aren’t just surviving but free to actually thrive in your autumn years.
What are the benefits of planning for retirement?
Nobody knows what will happen in the future. However, planning ahead for your retirement is the best way to keep the odds in your favour. Financial planning is a key element of preparing as early as possible for when you retire. It’s not surprising that starting as soon as you can to save for retirement is the best thing you can do to get ready for your old age.
There are several benefits to enjoy if you start planning for retirement early. These include:
You won’t need to work forever
No matter how much you love your job (and the income it brings), you’ll eventually get to an age when either you’re tired of working or you can’t work because of health problems. When you reach this point, by planning ahead, you’ll have another source of income to rely on, eliminating the worry of what to do for cash as you plan for retirement.
You won’t need to rely on just the State Pension
Anyone who has paid National Insurance contributions for 10 years or more of their working life will qualify for the State Pension. For 2021-2022 the State Pension’s full level is only £179.60 per week. This equates to just £9,339 per year. Needless to say, that isn’t a lot of money. Even if two partners combine their pensions, they would still be a long way from the £27,000 that retired households spend each year in the UK on average.
You’ll get compounding returns on your pension
The term “compounding returns” is used to describe the way that investments grow more with time. Typically, pensions will be invested in things that grow year on year. For example, a sum of £100 that grows by 4% in a year will then be worth £104 at the end of that period. The year after, the 4% interest will also apply, but this time on the total amount of £104.
This means that at the end of that period, the growth will be 16p greater due to the extra £4 from the previous year’s interest, so the sum total will then be £108.16. Compounding returns can be very powerful, especially if you start your retirement fund early. People who start to set aside money in a pension at a young age (for example, 18 years old) could get compounding returns on their total retirement fund for as long as 50 years by the time they reach retirement age.
You’ll enjoy a good quality of life for longer as average life expectancy is increasing
It’s never been more important to start planning for retirement as early as possible when you consider that the average life expectancy for men and women is rising. Soon, more people will spend longer in retirement than at any other period in history.
You’ll also have to stretch your finances out over an even longer period of time, so you can still support yourself as you get older. This is why it’s so important to make a retirement plan well in advance so that you can enjoy the very best quality of life in your old age and make the most of the benefits of early retirement.
You’ll be able to enjoy your time
Living longer is great news if you would like to spend more time living the lifestyle you’ve dreamed of and doing the things you’ve wanted to do your whole life!
But to do those things you’ll need enough money to cover the expenses.
The cost of going on more holidays with your family and experiencing all the things you’ve planned for can be high. Having an effective retirement plan will ensure you have the income you need to achieve these goals.
Having a good pension will allow you to have enough money available to enjoy yourself without worrying about security or expenses. After all, if you still need to work to make an income once you’re past the usual retirement age, you’ll have far less free time to spend on doing the things you love with your family and friends.
You’ll have money to support you if you have health problems
Unfortunately, once we reach 70 years old and beyond, we are more at risk of medical problems. The older we get, the greater the risk of developing a serious condition.
Having funds in place for this eventuality is of the greatest importance. Having money available will ensure you have support as and when you need it.
This could help you pay for medical insurance, assisted living, or emergency treatment in the future. If you open a personal savings account at a young age and pay in funds regularly, you could have a lump sum set aside in case of such expenses.
You won’t be a financial burden to your family
Nobody wants their loved ones to have to cover their cost of living in their old age. When you retire, you don’t want to rely on your children or other relatives to find the funds to cover your expenses.
Retirement planning is important as it will ensure you have an income that will allow you to cover unexpected costs that arise without being a financial burden on anybody else.
You’ll have fewer financial worries
Having a retirement plan is something that often gets overlooked, yet planning is important nevertheless.
When you’re young, you think retirement is just a distant time in the future and isn’t worth worrying about! But before you know it, your working life is coming to an end, and you need to think about where you’re going to get your income from.
This is why you want to consider retirement planning at as early an age as possible. Once your plan for your retirement income is in place, you’ll no longer have any financial worries about how you’re going to generate an income to cover your expenses in retirement.
Having a clear plan already set out isn’t just of great importance for your financial security when you retire, but it can also give your mental well-being a huge boost many years before retirement, especially if you tend to suffer from anxiety.
How do I get started with retirement planning?
Now you’re aware of why early retirement planning is important, it’s time to start thinking about getting your financial affairs in order as quickly as possible.
It would help if you started putting away your retirement savings in a pension fund as soon as you can to maximise your wealth in your old age and ensure you’re properly prepared for when you no longer want to work.
Here is some advice about how to get started with retirement planning:
Begin retirement planning early
Of course, you can’t begin your retirement planning any earlier than the day you read this article, so if you’re already close to retirement age, there’s nothing you can do to go back in time and start saving earlier!
However, if you’re still young, it’s the perfect time to start planning for your future finances. You probably think it’s too soon to worry about your autumn years, but any finance advisor will tell you that it’s never too soon to plan a retirement strategy and the earlier you begin saving, the more wealth you’ll enjoy when you quit work for good.
You can search online for a pension calculator if you want to see how much your pension might be worth if you begin paying into the fund at different ages.
For example, if you start investing £200 each month into a pension plan at 2 years old, your pension could be worth over £10,000 per year when you retire at 65.
If you begin investing the same amount in a pension plan at the age of 30, your pension will only pay out around £7,000 per year. This is a significant difference and only shows the benefits of investing in your retirement as early as possible.
Take out a pension plan
A pension plan is designed specifically to help you save for a better life during your retirement, so it makes sense to begin investing in one. The benefits include:
- Your employer matches a minimum of 3% of the contributions you make yourself.
- The government boosts contributions with as much as 40% in tax relief.
- You receive compounding returns.
All of the above means that your savings will increase year-on-year giving you more money to enjoy your life post retirement.
Track your pensions
The typical employee in the UK will work at eleven different companies in their life. This means they’re likely to have several pensions. It’s important to keep track of your pension portfolio as this could stop you from losing thousands due to paying unnecessary fees.
You might want to consider combining all of your pensions into a single fund or plan. This will make it much simpler to keep an eye on how they’re doing.
Check your age of retirement
When you can begin to claim your pension will depend on the year in which you were born. Go online and check the government’s official website, which will tell you when your State Pension can be claimed from.
Should you prefer, you can delay receiving your State Pension. This will increase the sum you receive each year. Using this information can help you decide the perfect time for your retirement.
Understand different types of pensions
There are several different pensions available, and you need to understand which one you have or which one you want to set up.
- Workplace pensions – your employer will typically automatically invest on your behalf into a “default fund”. So long as you’re happy with this option, you need do nothing more. You may, however, find that there are better funds out there you may opt for. You can change your mind at any time and switch.
- Personal pensions – if you’ve set up your own plan, you typically need to choose upfront where to invest. Usually, providers will give you an option of several different investments, and an adviser should support you in making your decision.
- Stakeholder pensions – these come with standard investment options which you select.
If selecting investments for yourself, there are a few things to consider:
- How long are you investing for?
- Consider the impact of inflation on your investment. You need your investment to grow by more than inflation, or your spending power will decrease.
- How risky is the investment?
- Should you invest in a varied portfolio, including mutual funds?
- Charges and fees
Think about your options some years before retirement
Don’t leave your retirement plan until the last minute, or you could end up making poor choices. Start to think at least a few years before retirement whether you want to take a lump sum at the age of 55 or whether you want to use that amount to purchase an annuity. Alternatively, you could leave that money in the pension and make drawdowns regularly.
Some things to consider when it comes to making investments with your pension pot include:
Lump sums and cash withdrawals
Lump sums involve closing your plan down completely and taking the entire sum in cash at once. Cash withdrawals, on the other hand, are similar to using a bank account.
You can make a number of withdrawals as and when required, although there may be a maximum number that you’re permitted to make. Not every provider can handle cash withdrawals, or you may be subject to high charges or fees for every withdrawal you make.
You may also be subject to high levels of tax. Only 25% of lump sums (or each withdrawal) will be tax free. The remainder is subject to tax. This may put you in a higher bracket for tax which means you pay a lot more.
Annuities turn your fund into a yearly amount that gives you guaranteed income for a certain period (or for life). You needn’t purchase your annuity from your own provider – you can compare the market and get the best personal quote before making a final decision. Remember, though, that you cannot change provider or plan once you’ve made your purchase.
Also, not all products are equally flexible, and this may leave you with a lower income in the future due to increased costs of living because of inflation. Rates may also increase or decrease depending on the state of the economy or stock market.
Income drawdown schemes
Drawdown schemes allow you to invest some of your retirement savings (or all of it) into an investment scheme. This investment scheme is then invested into the stock market. You’re permitted to draw down income from the investment with no restrictions as to how much you’re allowed to take.
It’s important though to remember that the fees may be high and the income you receive from your investment isn’t necessarily guaranteed. Also, as these investments have no maximum withdrawal limit per year, you may find that you accidentally run out of income. Furthermore, consider that these investments may increase or decrease depending on the economy or stock market.
It may be difficult to decide what you want to do, so speaking with a financial advisor may be the best course of action. This will help you clarify your options and determine the right solutions to enjoy your retirement to the full.