How to start planning for retirement

It’s never too early or too late to start planning for retirement. No matter what your age, there are steps you can take to improve your post-work years. Here, specialists in retirement planning, Hambleys IFA share their tips on how to get you started. 

Use tax-efficient savings methods 

The default way of saving for retirement is by making contributions to a pension fund. This approach makes a lot of sense for employees who qualify for workplace pension schemes. They benefit from employer’s contributions as well as tax benefits. 

It can also make a lot of sense for couples who are married or in a civil partnership. If the couple has unequal incomes then the higher earner can make pension contributions on behalf of the lower earner. These then qualify for tax relief so their value is increased. 

For freelancers, however, the situation can be more complex. Freelancers on lower incomes may find it better to use a Lifetime ISA. LISA savings qualify for an annual bonus of 25% up to a maximum of £1K. This would leave their lifetime pension limit free to be used as their earnings increased and they wanted to save more. 

You can also use regular ISAs for retirement savings. In fact, for some people, this may be better than using LISAs or making pension contributions. Savings and investments in a regular ISA can be accessed whenever you need them without penalty. They can also be replaced in the same financial year. 

Understand the nuances of workplace pensions 

If you qualify for a workplace pension, your employer must enrol you in one unless you specifically opt out. It’s preferable to stay opted in so that you benefit from your employer’s contribution. 

The potential challenge, however, is that staying opted in requires employees to make a minimum level of contribution themselves. Some people may not feel comfortable with committing to that. 

If you find yourself in that situation, you can ask your employer if they would pay your contributions into a different vehicle such as a private pension or a LISA. They are entirely within their legal rights to refuse and may do so. There is, however, no harm in asking. 

By contrast, if you are able to commit to pension saving, you might want to ask if you can use salary sacrifice. This means that your employer would pay an agreed portion of your salary directly into your pension. The deduction is made before Income Tax and National Insurance and so reduces your liability for these. 

Save as much as you can 

If you are auto-enrolled into a workplace pension, then you will need to pay a minimum contribution of 8% of your total salary. Of this, your employer must contribute a minimum of 3% of your total salary. This means that the employee’s maximum contribution is 5%.  

If your employer pays more than the minimum contribution, you may be able to reduce your contribution. You would, however, need to check your own scheme’s rules to see if this was allowed. Even if it is, it may not be advisable. It’s far better to save too much and then reduce your contributions than to save too little and have to catch up. 

If you’re freelance, then it can be useful to try to follow the guidelines for employees. You don’t have to make monthly contributions the way they usually do. You could set money aside over the year, as your funds come in and pay them annually. 

If you’re a home-maker then aim to save at least 8% of the minimum wage. Also, check to see if you qualify for National Insurance credits. If you do, be sure to claim them even if the administration is a hassle. They will boost your entitlement to a state pension. This may not be much but it is a lot better than nothing at all. 

Try to estimate how much income you’ll need 

This can be very tricky, hence the emphasis on saving as much as you can. If you’re in your 20s and 30s then retirement is so far away that it can be impossible to make estimates with confidence. Even in your forties and early fifties, you may still have to make a lot of guesses. By this point, however, they should be more accurate ones. 

For example, by the time you’re in your forties, you should know if you’re likely to buy a house. If you are (or have) then you should know when you can expect to pay off your mortgage. If you have any other debts, you should have a plan for paying them off and know how long that plan will take. 

Crucially, you should also have a clear idea of what your future earnings potential will be. This will depend partly on your occupation and partly on how long you can work. In particular, if you can go on working beyond the official retirement age, you can potentially make your retirement savings go a lot further. 

From your mid-fifties, if not earlier, you should be tracking your outgoings carefully. Think realistically about which ones you need to continue in retirement. Then highlight which ones you want to continue in retirement. Then put together a plan for dealing with the rest. 

Think carefully about your retirement accommodation 

Your accommodation has to fit your needs practically and emotionally as well as financially. This means that there is no one-size-fits-all answer to the question of whether or not to downsize.  

Similarly, there is no one-size-fits-all answer to the question of whether or not to use equity release. There is, however, one golden rule before signing up to it and that is to get independent, professional advice. 

Check in regularly with a financial advisor

Ideally, you should check in regularly with a financial advisor throughout your life. At a minimum, you should do so in the lead up to retirement. A financial advisor can do a lot more than just make sure that you have your financial paperwork in order. They can also advise you on how best to deploy your retirement funds.

Modern pensioners are now free from the obligation to buy an annuity. This may, however, be the best option for some people. If it is, then it’s vital to choose the right one. If it isn’t, then it’s equally vital to invest your pension funds in a way that balances growth with risk management.