How to plan for your retirement: ten top tips
1. Start as soon as possible
Although it may seem like a long way off, the sooner you start saving the easier it will be to give yourself a more comfortable lifestyle in retirement. Even if you cannot afford to save much initially it is better to do something than nothing at all
The money you save first will be invested for the longest time and so will have more chance to grow
For example, if you invest £100 and it grows at 6% each year, after 10 years it is worth £179, after 20 years it is worth £321, after 30 years it is £574 and after 40 years it has grown to £1,029.
2. Join your company scheme
It makes sense for most people to join their company pension scheme. These schemes are usually good value and all employers have to pay into their eligible employees’ pensions, or if not they will have to soon as pension auto enrolment is implemented for all employers
Another advantage of joining your company scheme is that your contributions come out of your salary before you receive it, so you shouldn’t miss the money that goes into your pension because it is never actually in your hands
3. Use pensions and ISAs
For most people the best approach for long-term savings is a combination of pensions and ISAs
Pensions provide initial tax relief which give your savings an immediate uplift, where as ISAs can still be tax efficient and you are able to access your money whenever you like.
4. Take more risk when you’re younger
When you are younger and have a long period until your retirement date you can afford to take more risk with your investments especially if you’re investing monthly amounts, which most people will be.
Investing in shares is likely to give you the best long term returns, although as your pension fund gets bigger and as you get closer to retirement you should hold more money in other assets such as cash, fixed interest and property, as capital protection should become as important as capital growth
5. Increase your pension contributions when you get a pay rise
While you might only be able to invest a smaller amount initially you need to actively increase this as you get older, otherwise the effects of inflation actually mean that in real terms you’ll be investing less and less over time
Look to pay in more as your salary increases and also at other times when you have more disposable income, for example when children leave home or mortgages are paid off
6. Keep an eye on under performing funds and high fees
It is important that you review your pensions, ISAs and other assets you’ll be relying upon in retirement on a regular basis. Make sure you understand how they’re performing and what they’re likely to provide for you when you retire
You don’t want to find out that you’re not on target to achieve the standard of living you want in retirement when it’s already too late
7. Make sure you understand your state pension entitlement
Find out what state pension you could be entitled to and when you’re likely to receive it. Also see whether there is anything you can do to boost this, such as making extra contributions.
The state pension is changing from April 2016 and so if you’re getting near to retirement make sure you understand how any changes might affect you
8. Decide how you will take income from your pension?
You need to give some thought as to how you’re going to generate an income in retirement.
If you’re planning to remain invested while taking an income from your pension this should affect your investment approach. You could retire at age 65 but then live for another 30 years or more, which means that if you take too much risk you could be gambling with your future income where as if you take too little risk your pension could be eroded by the effects of inflation
9. Don’t discount annuities
Annuities provide an income which is guaranteed for life. Those who have stopped working should not underestimate the importance of this if they will be relying on their pension to support themselves in retirement
We recommend that people have secure income to cover their basic living costs in retirement. This income could come from a combination of the state pension, defined benefit schemes and lifetime annuities. They shouldn’t be gambling with the income they need to pay for day-to-day bills and living expenses
For many people it is better to accept a lower annuity rate than a higher risk product which could put their future standard of living at risk
10. Take independent financial advice
Retirement planning can be complex, and getting it wrong could have a huge impact on your standard of living in the future, so it’s important to make the right decisions to achieve your retirement goals
If you’re not entirely sure what you’re doing, then you should take independent financial advice.
Patrick Connolly is a certified financial planner at Chase de Vere