Retirement can be a time of considerable change; you’ll no longer be working, you’ll have far more free time, and you’re likely to see some decline in your health. Effective retirement planning like having a pension in place can help you not just survive, but thrive during this later period of your life.
Why is retirement planning important?
It might be impossible to predict how the future might turn out, but we can at least stack the odds in our favour. We can do this by preparing accordingly, which is why planning for our retirement is a very smart idea.
You can’t work forever
At some point you’ll reach an age where you either won’t want to work anymore, or just can’t work anymore (due to health reasons, for example). And at that point you’ll need to rely on other means of income.
The State Pension won’t get you far
If you pay National Insurance for at least 10 years of your working life, you’ll qualify to receive the State Pension. As of August 2020, the most you can get from a State Pension is £175 per week (£9,110 per year). This isn’t very much to live on. In fact, if two partners combined their maximum State Pensions they’d still fall far short of the £27,000 per year retired households spend on average in the UK, according to a Which? survey.
Pensions benefit from compounding returns
In a nutshell, compounding returns is the term used to describe how investments appear to grow more over time. This is because pensions are invested in things that tend to grow year after year.
For example, if £100 today grew 4% over the next year it would increase by £4. But if that £104 grew 4% again the next year, it would increase by £4.16 to £108.16. This is the power of compounding returns. If you start investing young enough, you could benefit from compounding returns for up to 50 years.
We’re living longer than ever
With the average life expectancy continuing to rise, more of us will be spending more time in retirement than ever before.
On the one hand, this is great - there’s more time to spend doing the things we’ve always wanted! On the other, it means you’ll need to stretch out your finances so that you’ve the income to support you for longer.
You’ll want to enjoy your retirement
Retirement is the perfect time to travel to those unvisited places you always wanted to visit, start a new hobby you’ve been delaying, or spend more time with your grandchildren. Unfortunately, most of these things don’t come for free.
Income from a pension could help you achieve all this. And if you’re still reliant on working for money when you’re older, you’ll have less time available to spend doing what you love.
You might see your health decline
Sadly, growing old doesn’t come without its downsides. As we get older our risk of developing a serious health condition increases. This is why it’s important to have money available to support you if you need it. This might include paying for health insurance, emergency treatment, or assisted living.
You won’t become a financial burden on your family
Having income retirement in place will help you pay for any unexpected personal expenses without needing to rely on the help of others. Of course, there are many circumstances where this is unavoidable, but having your own retirement income in place could go a long way to relieving the burden on others.
It’s one less thing to worry about
Perhaps an often overlooked aspect of retirement planning is that once everything’s in place, you no longer have to worry about not being prepared for retirement. This can be a massive boost for your mental health, particularly for those who are naturally anxious.
How to plan for retirement
Now that we know why retirement planning is important, let’s look at how to go about it.
1. Start early
If you’re young, retirement might feel like a very long way away - but starting to put money away early on can really pay off in the long run.
We used the PensionBee pension calculator to see how much more a pension could be worth if a saver started paying in at 20 rather than 30 years old. The difference is stark.
Investing £200 per month from 20 years old would result in a pension worth £10,279 per year if retiring at 65.
Investing £200 per month from 30 years old would result in a pension paying out £7,098 per year if retiring at 65.
2. Start a pension
Pensions are specifically designed to help you save for retirement, and there are many benefits to getting one.
- Your employer will match at least 3% of your own contributions
- The government will boost your contributions with up to 40% tax relief
- You’ll benefit from compounding returns (see above)
3. Keep track of your pensions
The average UK employee works at 11 companies during their lifetime, and are likely to accumulate different pensions as they go. Keeping track of your pension is essential and could prevent you from losing out on thousands of pounds as a result of paying unnecessary fees.
One of the best ways to avoid losing track is to combine your pensions into one.
4. Check your State Pension retirement age
The age at which you can start claiming a pension depends on when you were born. You can find out your State Pension retirement age on the official Gov.uk website.
You can choose to delay receiving the State Pension if you like, and doing so will increase the amount you get per year.
You can use this information to help decide when you want to retire.
5. Consider your options a few years before retirement
When you retire, you can choose what to do with your pension. This might include taking out a lump sum when you turn 55 or using it to buy an annuity. You could just decide to leave it where it is and make regular drawdowns.
Before deciding which option’s right for you, you’ll want to give it plenty of thought. You might even want to speak with a financial adviser. So give yourself plenty of time to consider your options - at least a year, ideally.
Consolidate your pensions with PensionBee
If you’ve accumulated multiple pensions over the years, you might want to consider consolidating them into one simple online plan.
- Sign up in minutes
- Pay one simple annual fee
- Manage your pension from anywhere with the PensionBee app
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.