If you are in your 50s or 60s, your thoughts maybe turning towards retirement and raising questions such as when should you retire and how much money you’ll need.
In doing so, you face a problem. Because of longevity trends, on average we are living longer, so your wealth may have to provide you and your spouse or partner with an adequate income for 30 or even 40 years.
Britons aged 30 today have a 50% chance of living to more than 100, while 50-year-olds have an even chance of reaching 95. Longer lifespans raise financial challenges however – for individuals as well as for families and society.
The idea of a retirement lasting many decades may seem appealing, but longer retirements mean more years of living off your pension and savings. So will yours be enough?
Extra benefit of compound interest
How much money you need to save depends on when you actually start saving and how much you want to save in total. The earlier you (and potentially, your employer, if they match your contributions) start adding to your pension pot, the less you will need to save each month because the cost is spread over a longer period.
Moreover, if you start saving earlier, your funds will accrue the extra benefit of compound interest throughout the duration of your savings. Making money from the interest means you can actively save less but still end up with the same amount.
The good news is that changes to pensions also now mean you have much more freedom and flexibility over how to take your benefits – whether as tax-free cash, buying an income for life, leaving your pension fund invested while drawing an income, or a combination of all these options.
Building a retirement nest egg
Over the last few decades, employer pensions have generally become less generous and people starting a new job in the private sector are very rarely offered a traditional defined benefit pension – where the employer guarantees you a certain level of pension based on your salary and length of service.
A number of attractive tax breaks
Importantly, pension savers benefit from a number of attractive tax breaks, including Income Tax relief on contributions and up to 25% of the proceeds being tax-free. For 2019/20, the annual limit on tax-relievable personal contributions is 100% of your salary (or £3,600 if more). In addition, there is a limit on tax-efficient pension funding called the ‘annual allowance’ (£40,000 for most people) – this applies to both contributions paid by you and your employer and, if exceeded, means you will pay tax on the excess (an annual allowance charge).
We’ll help keep track of your pension contributions so that you know if you’re getting close to your annual limits.
In some cases, we may be able to ask your pension provider to pay the charge from your pension benefits. You may not be subject to an annual allowance charge (or a lower charge may apply) if you have unused annual allowances from the previous three tax years that can be carried forward.
Increasingly, more people are also being caught by the ‘lifetime allowance’, which puts a limit on the total value of their pension funds that can be accumulated without suffering a tax charge. From 6 April this year, the pensions lifetime allowance increased to £1,055,000. This is the maximum amount that you can accumulate in your pension plans without suffering a tax charge (lifetime allowance charge).
Saving more, working longer and having the right financial plan – this combination is likely to be much of the solution for the longer lifespans that many of us hope to enjoy. We’re here to help you make good decisions so you can live the lifestyle you want when you retire. To find out more, or to discuss your situation, please contact us.
 The 100 Year Life: Living and Working in an Age of Longevity, by Andrew Scott and Lynda Gratton September 2018.
A pension is a long-term investment.
The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.
Pensions are not normally accessible until age 55. Your pension income could also be affected by interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
The value of investments and income from them may go down. You may not get back the original amount invested.
Past performance is not a reliable indicator of future performance.
If you'd like to discuss your retirement planning, please get in touch with Tracy Horky on 07710679849 or email email@example.comFind out more about our Financial Planning & Wealth Management services
If you like this article and would like to subscribe to INSPIRED, our FREE monthly newsletter, then please click SUBSCRIBE.Subscribe