Quantcast
Menu
Save, make, understand money

Retirement

BLOG: Retirement through the ages

Cherry Reynard
Written By:
Cherry Reynard
Posted:
Updated:
19/01/2015

Talk of retirement seems to be all the rage at the moment as the news from the 2014 Budget reaches out to savers of all age groups.

The simple message is that if you have saved for your retirement in a defined contribution pension then you will be trusted to access this however you want to, with a new range of flexible withdrawal options. The good news is you can have as much as you like, when you like, after the age of 55. The not so good news is you need to have some pension savings in the first place and there are still plenty of things to consider.

At AXA Wealth we commissioned some YouGov research and asked different age groups what they believe they will need to live on in retirement:

The results show that, with some rounding, broadly speaking £16k is the figure for those in their twenties, £18k for those in their thirties and £20k for those forty and older. The actual journey towards, and into retirement, can be a long one and many things can change along the way. Some things will change depending on which age bracket you are currently in, so it might be worth looking at some thoughts for each of these.

In your twenties
Is this too early to start thinking about retirement, an event that could be 50 years in the future? Definitely not. As with all projects you need to start with a firm foundation and it is in the twenties that this should happen. It will be early thoughts at this stage, although having a date to start planning towards helps. State pension age (SPA) is a great starting point and, currently, for anyone turning 20 today this is age 68.

Having an income figure in mind at this stage may be difficult so let’s use the rounded figures from the research above to put this in perspective. If we take the higher figure of £20k per year and try to put that in today’s money terms – how much will that be at age 68? Allowing for an assumed inflation rate of 3% per year, by the time you reach 68 this is a sizeable £82,645 per year, which highlights the risk inflation can have on things!

The really good news is that you have time on your side. You will probably qualify for the basic state pension – more on that later. The second thing to consider is if you are part of a workplace pension. Most employers in the UK are required to enrol you in one, or have an equivalent employer scheme, and they are extremely valuable. In the next few years the contribution rates for workplace pensions will reach 8% of a certain band of your earnings. 3% of this is paid by your employer, 1% is tax relief from the government, leaving 4% to come from your net pay. The value of a company pension cannot be overstated and this should provide the firm foundation as you move into your thirties.

A couple of other things to consider in your twenties are whether you are one of the lucky few whose parents or grandparents set up a stakeholder pension for you when you were a child. Worth knowing and making part of the plan.

Lastly if you can afford to save any extra money for things like house deposits, cars or holidays, you will probably look at cash or ISA savings first, because of the ability to access your money. However, if you can put money in your pension you will get tax relief and the benefit of time. If you are a basic rate taxpayer and pay £40 per month net, from 20 until you retire at 68 this could grow to over £119,000 if we assume a 5% growth rate and, of course, the performance of your investments.

In your thirties

This is traditionally the decade where it can be very difficult to balance the income versus expenditure situation. Events such as marriage, buying a home and having children may have already happened or be imminent. This is the time of resolve where your plan will be put to the test – can you keep on saving or even start to increase? There are a number of positives to think about here though.

First, marriage means a partner who may have their own prospect of a basic state pension, workplace and personal pension savings so these need to be factored in. This is a great time to really think about income and expenditure – what outgoings will disappear as you get older? Will you need to rethink the figure of £20K?

Tax relief plays a big part in retirement savings in a pension scheme. As discussed earlier if you pay in £40 per month the government will put in an extra £10 for a basic rate taxpayer. This is great news, however if you are a higher rate taxpayer you are entitled to reclaim an extra £10 tax relief through your tax return – even better. You can choose to pay in a little extra so you are still effectively paying £40 out of your own pocket if you want to.

To really illustrate how having time on your side works lets revisit paying £40 per month net as a basic rate taxpayer. If you now started at 30 and saved until you retire at 68 this could grow to around £68,000, again if we assume a 5% growth rate. This really shows the value of starting as early as possible.

In your forties
There are lots of things to think about at this stage as the nature of your outgoings change, it could be children’s university costs or a bigger home. This is also the age when most people really start to think about when retirement might be a reality. We have discussed having 68 as your potential target up to now, but will you want to work that long?

Currently you can draw your pension savings from 55 – is this too early? Will you work part-time? Lots of questions around when, but another critical one is how long you will spend in retirement? One of the big risks to your savings is longevity, which really means how long does your money need to last?

The latest life expectancy tables show that a 40 year old male can expect to live until age 80, for a female it is 84 . This really brings home not only the amount of income you may need to produce from your retirement savings but when, in reality, you can start to wind down.

Earlier we talked about the benefit of tax relief and it is also worth thinking about tax when you are in a position to retire. Currently most pension savings can be taken with 25% of the fund paid tax free. The rest will be taxed at your marginal rate, which could be non-taxpayer, basic, higher or even additional rate. This is another key consideration when thinking about your income in retirement. Where is the money coming from, what tax liability am I likely to have and how much does this leave me net of tax?

In your fifties
At this stage retirement becomes a real focus for many people. Definitely time to revisit the income and expenditure situation: some costs such as mortgage and children may have fallen away so there may be more to save. Lots of the things we have discussed will be coming into clearer focus now like what is my SPA, when does my workplace pension start to pay out, what other pension savings have I got, is my intended retirement date still realistic, etc.

If you haven’t already done it then some form of cash flow planning, how much money you have coming in compared to going out, may help here as this brings all of this to life in a graphical way that helps many of us. A key consideration when looking at your income needs is what shape are they likely to be? Retirement is no longer a set date for many people and your income might be needed to top up part-time work in the early years, then increase as you actively enjoy your full retirement.

For most there is a period where they are not so active so the income can be reduced and this could be followed by a period where the need is quite high as care is needed. This changing shape of potential income need is sometimes referred to as the “Retirement smile” and needs careful thought and planning. The great news is that the new pension withdrawal options coming in after April 2015 really help with this planning.

In your sixties and beyond
Now is the time when you are hopefully enjoying the longest holiday of your life: retirement. However, this is when the real planning you have been doing becomes reality and you need to put those plans into action. The new pension rules allow a number of flexible withdrawal options where you can draw on your pension savings – which one is right for you?

The key here is to keep reviewing your plan and taking the income you need from the right place and looking to do this as tax efficiently as possible. Should the money come from the pension scheme or an ISA? Have you used all of your personal allowances to minimise tax? It may be time to revisit longevity, has anything changed which could impact the income you had planned for?

Some people may find that they have a number of smaller pensions from previous employments and it may be beneficial to bring these all together into one place. This is not exclusive to this stage of life but this is where it usually happens – it could be a good idea all through the journey.

One other aspect to consider at this stage is whether you will have any pension savings left over when something happens to you, who do you want them to go to. The new rules have made this type of asset a very attractive and tax efficient way to pass your wealth on to the next generations.

In summary there are a number of things to think about at the start, during and towards the end of the retirement journey. I have highlighted different aspects at different life stages, but it’s fair to say that most of them apply at any stage. The key thing is that if you give it the thought and planning it deserves, achieving the retirement that you want is within your control.