ePrivacy and GPDR Cookie Consent by Cookie Consent How to Plan for Your Retirement

How to Plan for Your Retirement

To get the most from life when you stop working, it pays to think ahead. And how you plan for your retirement is crucial.

Two major questions you’ll probably be asking yourself are:

  • Do I want to retire early?
  • Would it be better to continue working into later life?

What you decide largely comes down to when you can afford to retire.

Other important considerations as you get nearer to retirement include:

  • How much State Pension will I get?
  • How much money should I be putting in my pension pot?
  • How can I figure out how much total retirement income I’ll be getting?

You can find out here what you need to know about planning for your retirement.

Types of Pensions

There are three main ways to build up an income for when you retire.

State Pension

The State Pension is paid by the government every four weeks. You can currently claim it once you reach the age of 66, but the State Pension age will start to gradually increase from 2026.

The full State Pension for 2023-2024 is £203.85 a week. You may get less, depending on your National Insurance contributions while working.

You need to have at least 10 years of National Insurance contributions or credits to qualify for the State Pension, and a minimum of 35 years of contributions to get the full amount.

Your State Pension will increase at the start of each tax year in April.

Workplace Pension

All employers are required by law to offer a workplace pension scheme. This is funded by you, your employer, and the government.

There are two main types of workplace pensions:

  • Defined-contribution pension. You get a retirement income according to how much you and your employer contribute and how much this grows. These are also known as money purchase schemes.
  • Defined-benefit pension. These pensions are generally now only available from older workplace pension schemes or in the public sector. They’re based on your salary and how long you’ve worked for your employer.

By law, you and your employer must pay at least eight percent of your earnings into your workplace pension fund. Your employer must pay in three percent of this, but they can choose to pay more. The other five percent is covered by your contributions, but you can also choose to pay more.

Personal Pension

As the name suggests, a personal pension is one you set up yourself.

The amount you’ll get on retirement depends on how much you’ve paid in and how your pension provider has invested it – investments such as shares can go up or down.

Types of personal pension include:

  • Self-invested personal pension (SIPP), where you control the investments.
  • Stakeholder pension, which must meet specific government requirements.

Personal pension plans provide an option for individuals not in paid employment – if you work on a freelance contract basis, for instance.

Some employers also offer personal pensions as a workplace pension, and you can have a personal pension fund alongside a workplace pension.

Will Your State Pension Be Enough to Live On?

The State Pension is designed to cover basic needs. Many retirees want the security of extra money from a pension pot to maintain a comfortable standard of living.

That’s where personal pensions and workplace pensions come in.

A further option is to save up to boost your pension income. Although there’s no such thing as a pension savings account, you can use a general savings account to put money aside for your later years.

Some people, for example, take out an ISA (individual savings account) as a pension pot, and you can save up to £20,000 a year tax free.

A potential advantage of saving or investing outside a personal pension or workplace pension is that you can access the money sooner, rather than having to wait until you’re 55.

Commons Pitfalls when Planning for Retirement

Common, costly retirement mistakes include:

Is There a “Normal” Retirement Age?

You may think of your retirement age as being the same as State Pension age.

But retirement is no longer a fixed date in your diary when you say goodbye to the nine-to-five.

Increased flexibility around employment and on taking money from your pension means you could choose to retire over a period of time that suits you.

You may want to retire early if, for example:

  • You have health concerns, which can affect your ability to work
  • You feel comfortable that your pension pot and savings can provide you with enough income to last you for the foreseeable future
  • You don’t have major financial commitments, i.e. mortgage, high purchase finance, loans, etc.

On the other hand, you may choose to carry on working. You can do this while claiming your Stage Pension. Or you can delay claiming your State Pension, which could increase the payments you get when you do claim it.

How Much Money Do You Need to Retire?

Working out a realistic retirement age based on how much money you’ll need is a key part of retirement planning.

As a rough guide, money experts say that for a comfortable retirement, you need between half and two-thirds of the income you had while working.

When you retire, some of your expenditures will decrease or be eliminated entirely, such as:

  • Your pension contributions.
  • Your national insurance contributions.
  • Commuting costs.

However, you may tend to spend more on entertainment and maintaining your current lifestyle once you’ve stopped working, and you’ll still have household costs that may continue to increase, such as:

  • Energy bills.
  • Council Tax.
  • Mortgage.
  • Water rates.
  • Landline phone and broadband charges.

Pension Calculators

You can use a pension calculator to give you an idea of how much income you could have during retirement. It can also help you decide whether you need to start saving more.

This handy free pension calculator works out how much your pension will be worth when you want to retire, taking into account factors such as:

  • Your current age.
  • How much you already have in your pension pot.
  • Your monthly contributions.
  • Your employer’s contributions.

Posted in Personal development, Personal Finance on Sep 18, 2023.

Jason Bovington

Written by Jason Bovington - COO

Jason became Chief Operating Officer in July 2022. He joined Everyday Loans initially in 2006 as part of the start up team implementing the credit risk strategy and building the analytical capability as Head of Credit Risk and Analytics. In his time with Everyday Loans he has also held the roles of Chief Risk Officer and Chief Credit Officer. Prior to joining Everyday Loans Jason spent 10 years at HFC Bank with his last role there being Credit Risk Director and prior to that he was part of the Credit Risk team at Lloyds TSB.

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