By the time we reach our 50s and 60s, most of us will have spent several decades working and may be looking forward to enjoying our retirement in the not-too-distant future.
Whether your plans for the future include travel, spending more time on hobbies and activities, or seeing more of friends and family, retirement should be the longest holiday of your life. Therefore, it’s essential to check that you’re on the right track financially in the run-up to stopping work.
Here, we offer 9 tips to help you plan for the retirement you deserve.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
Contents
- Decide when you want to stop work
- Check the value of your pensions
- Do you know where your pension savings are invested?
- Work out your State Pension entitlement
- Think about how much income you’ll need once you stop work
- Boost your pension contributions if you can afford to
- Remember carry forward rules
- Make sure you claim back higher rate tax relief
- Have you thought about providing for your dependents?
1. Decide when you want to stop work
You’ll only be able to work out how much money you’re likely to need to fund your retirement once you have a clear idea of exactly when you want to retire.
There’s no fixed age at which you must hang up your work boots, and the right time for you to stop work will depend very much on your individual circumstances. However, most people won’t be able to afford to retire until they can start drawing an income from their pension, or start claiming the State Pension.
If you have a defined contribution workplace pension, these schemes set a normal retirement age, which is typically 65.
Similarly, old-style final salary or defined benefit pensions set a retirement age when people are expected to retire. This age – called a normal retirement age – can vary from profession to profession and scheme to scheme, but it’s typically 65. However, it could be 60 or even younger. However, if you’ve taken out a pension directly with a pension provider, or through an independent financial advisor, you can usually access your retirement savings from the age of 55, rising to 57 by 2028. Find out more in our guide When can I retire?
It could be that you don’t intend to have a ‘hard-stop’ retirement, and you may want to reduce work gradually, in which case your pension income will be supplemented by your pay for a certain period. You can learn more about this in our guide; How can I phase my retirement?
2. Check the value of your pensions
Once you have a retirement date in mind, you’ll need to check the current value of your pensions. You can find this information on your annual pension statement.
Your statement should provide you with an estimate of how much your pension could be worth at retirement based on several assumptions. It will also tell you how much income your pension could provide, usually based on current annuity rates.
These figures assume that you’ll continue to pay into your pension until you reach retirement age, and are based on a particular rate of investment growth. However, it’s important to remember that no one can predict with certainty exactly how your investments will perform, so these numbers shouldn’t be taken as the amount you’ll definitely receive at retirement.
3. Do you know where your pension savings are invested?
If you don’t know exactly where your pension is invested, it’s well worth checking your annual statement to find out. Unless you’ve specifically notified your pension provider that you want your retirement savings to be invested in a particular fund or funds, your contributions will usually be invested into what’s known as a ‘default fund’.
This type of fund typically automatically adapts the level of investment risk the closer you get to retirement. For example, when you’re in your 30s and 40s, your pension may be invested in higher-risk investments. But, the closer you come to retirement age, your savings may be moved into lower-risk investments, such as bonds and cash. This is to try to reduce the risk of sudden stock market setbacks affecting the value of your pension pot just before you retire.
Ideally, you should regularly review your pension investments, and ensure that any funds your money is held in are well-diversified to help manage volatility. You can read more about the importance of diversification in our guide; Investing – the basics. You should also make sure that your pension money isn’t invested in riskier investments than you feel comfortable with. There’s more on this in our guide Where is my pension invested?
Try not to be downhearted if your pension investments fall in value – it doesn’t mean they won’t recover. Stock markets can be turbulent, so it’s natural to go through periods when they dip. You can learn more about managing volatility in our article Nine tips for maximising your pension savings in difficult times.
Pension investment decisions are the kinds of decisions that can be good to take independent financial advice about. An advisor will be able to make recommendations that are suitable for you based on your approach to risk and your investment timeframe.
4. Work out your State Pension entitlement
Most people’s retirement income consists of both workplace or personal pensions and their State Pension.
The actual amount you’ll receive from your State Pension is based on your National Insurance record, so it’s worth checking whether you’re on track for the full amount.
You can start by getting a State Pension forecast to give you an estimate of how much you’ll receive once you reach State Pension age. Bear in mind that the State Pension age is gradually being pushed back in line with rising life expectancy, and is currently expected to increase to 67 by 2029, and again to 68 between 2037 and 2039. You can read more in our guide; How the State Pension works.
You’ll usually only be able to claim the full State Pension if you’ve made 35 ‘qualifying years’ of National Insurance Contributions. And you’ll usually need to have made at least 10 ‘qualifying years’ on your National Insurance record to get any State Pension. Learn more about the State Pension in our guide The State Pension explained.
5. Think about how much income you’ll need once you stop work
Once you’ve got a clear idea of how much income your State Pension and any workplace or personal pensions will provide you with, you’ll need to consider whether this is enough to enjoy the sort of retirement you’re hoping for.
As a general rule of thumb, experts suggest you’re likely to need around two-thirds of your salary at retirement after tax to maintain your current lifestyle, but this will depend on your personal requirements. For example, if you’re planning to take several trips abroad each year, you’ll obviously need a bigger pension pot to fund your travels.
The amount of income needed for a moderate standard of living in retirement currently stands at £31,300 in 2024 for a single person, according to the Pensions and Lifetime Savings Association’s (PLSA) Retirement Living Standards report, rising to £43,100 for a couple. This includes the cost of running a car, longer holidays abroad, and also covers increases in the amount spent on basics, such as food.
The report says that a single person would need an annual income of £43,100 for a comfortable retirement, rising to £59,000 for a couple, which would be enough to cover things like regular beauty treatments, trips to the theatre, and three weeks holiday in Europe each year. Learn more in our article How much do you need to retire comfortably?
6. Boost your pension contributions if you can afford to
If you’ve worked out there’s going to be a shortfall between the amount you’ll need in retirement and the amount your State Pension and any private or workplace pensions will provide, it’s important to look at ways you might be able to boost your savings.
The more you can save into your pension now, the more comfortable your retirement will hopefully be when you eventually stop work. And even a small increase in pension contributions can increase the value of your pension pot, thanks to the power of compounding. Compounding is when you earn interest or returns on the money you’ve saved and the interest or returns that money attracts.
Most people will simply make the minimum contributions they need into their pensions under auto-enrolment rules, but you can pay more if you want to. You can learn more about this and other ways you might be able to supplement your income in our article; How to boost your retirement income.
7. Remember carry forward rules
You can currently pay a maximum of £60,000 each tax year into a pension, or 100% of your earnings, whichever is lower, and receive tax relief at your marginal rate on your contributions. This is known as your ‘annual allowance’.
However, you may be able to pay more than your annual allowance into your pension using what’s known as ‘carry forward’ rules if you haven’t used your full annual allowance in previous years. This can be a useful way to boost your retirement savings and benefit from tax relief, particularly as you approach retirement.
Under this rule, you can carry forward unused annual allowances from up to three previous tax years. You might have some money to spare that could be paid into your pension if, for example, you earn more one year than previously, or have received an inheritance.
Bear in mind, however, that you can’t receive tax relief on contributions in excess of your earnings in any tax year, even using the pension carry forward rule. For example, if you earn £50,000 in a tax year, you can only contribute up to £50,000 to your pension that year, including any carried forward allowance. You can find out more about carry forward in our guide Pension carry forward explained.
8. Make sure you claim back higher rate tax relief
The biggest benefit of paying into a pension is the tax relief you receive on your contributions, which is particularly generous if you’re a higher or additional rate taxpayer.
For example, if you’re a higher-rate taxpayer, under current rules, you’ll receive 40% tax relief (compared to 20% at the basic rate) on your contributions. This effectively means that every £100 you pay into your pension from your earnings after tax is increased to around £166 (that’s because £166 taxed at 40% falls to £100). That’s a hefty 66% increase in your contribution. However, whilst 20% basic rate tax relief is paid automatically if you’re a higher or additional rate taxpayer, you’ll usually have to claim the extra 20% or 25% tax relief you’re entitled to back yourself.
You can do this through your self-assessment tax return, by stating the amount you’ve paid into your pensions on page TR4 of your return. You should include the amount you’ve paid in that includes the basic rate tax relief of 20% (unless you contribute by salary sacrifice, in which case, you don’t complete this box), but don’t include employer contributions. You’ll then receive the higher or additional tax relief you’re owed either as a rebate or a reduction in the amount of tax you pay. You can learn more in our guide; How do I reclaim higher rate pension tax relief?
9. Have you thought about providing for your dependents?
When thinking about retirement planning, you may also want to plan for how you’ll move assets down the family tree when you’re no longer around. Knowing your loved ones will be taken care of financially when you die can provide valuable peace of mind, and it’s worth thinking about how you might be able to use pensions to achieve this.
Pensions can be an extremely efficient way to pass on your wealth after death, as your retirement pot won’t be subject to inheritance tax (IHT), unlike other assets, such as your property or any savings and investments. That’s because your pension isn’t usually considered part of your taxable estate when you pass away. However, your beneficiaries may have to pay income tax on inherited pension savings, depending on the age you are when you die.
You can read more in our articles; Can my pension be used to reduce inheritance tax? and Do I need life insurance if I have a pension?
A final thought…
Retirement planning can be complex, so it’s well worth speaking to an expert if you’re not sure how much you’ll need to live on when you stop work, or whether your pension is on track to provide you with the lifestyle you want.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
Rest Less Money is on Instagram. Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.