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Planning your pension

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How much should I contribute to my pension 40?

Even though retirement will feel like a long way off at age 40, it will arrive faster than you think. Furthermore, being proactive with your retirement planning at 40 will relieve the strain of making last minute arrangements in your 50s and 60s. As we live longer and aim to retire earlier, our retirement could last 30 years or even 40 years and beyond. That is a very long time to be funding your lifestyle.

Giving an exact answer to how much you should contribute is very difficult, because this will vary from person to person. We all have different earnings, different levels of savings, and different expectations from our later life. Auto-enrolment means that employees will be contributing at least 5% of earnings into a pension, with employers topping this up with a 3% contribution. However, it would be wise to increase your contributions as you get older and most likely start earning more. Many employers will match your increase, meaning your pension pot benefits even more.

Contributing more to your pension also helps you pay less tax, as you receive tax relief on pension contributions. Whilst it may feel like you have lower earnings now, you are simply giving money to your future self.

How much savings should I have by age 60?

By age 60, you will most likely have at least one eye set on retirement. You will have a reasonable idea of the experiences you would like after finishing work – which countries to travel and how much golf to play each week. But are your savings sufficient to sustain your lifestyle for the rest of your life? That is the big question.

There are many factors deciding how much savings you should have at age 60. Your aspirations, your retirement age, your committed expenditure, inflation and investment returns – just to name a few! Knowing whether you have or will have enough is therefore extremely difficult.

You could carry out some simple calculations, assuming you spend a given amount per year and live x more years. However, this ignores most of the factors mentioned above, including the most important ones.

Our cashflow planning software enables us to input your entire financial picture including assets, investments, income and expenditure. It will then forecast your situation in retirement and make educated forecasts for investment returns and inflation. These forecasts are based on around 100 years of past data collated onto the system. As a result, you can see the chance of your pension savings being sufficient to last until you die. Reviewing this each year means that you can always ensure your plan stays on track.

Is £500,000 enough as a pension fund?

As mentioned above, there are many factors that determine the correct amount of pension savings you should have. By anyone’s standards, £500,000 is a lot of money. However, this can quickly run out once you start doing some calculations.

It is worth noting that many retirees will have a pension fund, ISAs, state pension and possibly other savings or sources of income. However, if we assume a couple has £500,000 in pension funds and nothing else, we can demonstrate how this may not go as far as you think.

This couple is planning to spend £50,000 per year in retirement and have both recently turned 65. Their average life expectancy suggests they will live to age 90, 25 years away.

Of course, they will also benefit from long term investment returns on their £500,000. Assume they make 5% per year for the next 25 years (this would of course vary massively but 5% as an average is simple to follow).

Calculating this through shows that this couple ran out of money at age 79, only 14 years after they retired. Therefore, clearly £500,000 was not enough to fund their lifestyle, and in this scenario, there would need to be discussions about spending less, taking more risk with their investments, or finding another source of income.

How much pension should I have at 50?

Many people dream of retiring in their 50s. In reality, the retirement age is getting later because we are living longer. This is one reason why the normal minimum pension age is being increased to 57 from 55.

At age 50, you should already have significant pension savings from your working life and not be playing catch up. The most effective way to estimate how much you should have is by using cash flow planning.

As mentioned above, our cash flow planning software is extremely beneficial for those starting retirement. It is also set up to assist those 10 – 15 years from retirement trying to ensure they are putting enough away each month to achieve their retirement goals.

Pension contributions can be factored into your scenario on the system so that we can simulate the rest of your working years and your retirement. That way, we can analyse whether your current pension savings are sufficient or whether you need to increase your contributions.

How much pension do I need to live comfortably in the UK?

Of course, every situation is different, and no two people’s lives follow the same path. However, some studies can estimate how much you will need as pension income in retirement to live comfortably.

Pensions and Lifetime Savings Association conduct extensive research into the Retirement Living Standards and update their figures regularly to factor in aspects such as inflation.

Their research has produced many different statistics. You can view their website,  Pension and Life Savings Association.

The overall figures show how much income is required to live a minimum, moderate or comfortable lifestyle in the UK. These are broken down into values for a single person and a couple. The latest figures are as follows:

Minimum

Single – £10,900

Couple – £16,700

Moderate

Single – £20,800

Couple – £30,600

Comfortable

Single – £33,600

Couple – £49,700

There are slightly higher figures for London. This demonstrates that considering the existing state pension in 2021/22 is £9,339 per year, this falls well short of providing sufficient income to live on in retirement.

Summary

Since Pension Freedoms was introduced in 2015, retirees have had more flexibility in utilising their pension pots. This has been a good change, but it also added complexity to the situation. We can clarify so that you understand where your retirement savings are compared to where they should be. Planning is the best and most effective method of ensuring you do not run out of money. Get in touch with us today for your free initial consultation.

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