Whether you are 25 or 65, spending time thinking about your retirement plans and how you will fund them is a worthwhile exercise. The answers to these eight questions can help you prepare for life after work.
Question 1: How much can I live on?
The minimum amount that a single person needs to live on for a basic lifestyle is around £10,000 (or £15,000 for a couple) according to the Pensions and Lifetime Savings Association (PLSA). A comfortable lifestyle in retirement that would include holidays and running a car would require £30,000 (or £45,000 for a couple).
If you're not sure what you need don't worry, you aren't alone:
People who know how much they need to save for retirement: 23%
People who are focused on their current needs and wants rather than their future requirements: 51%
Question 2: How much is the state pension?
The new state pension (introduced in 2016) currently provides around £9,000 a year. It is enough to cover many people's essential spending, but on its own is not enough for a comfortable retirement. Many people do not qualify for the full amount. To get the full state pension you will need to have paid 35 years' worth of National Insurance contributions. If you make at least 10 years of contributions, you will get a proportion of the new state pension.
You should not rely on the state pension - only 44 per cent of people claiming the new state pension receive the full amount.
Question 3: When can I claim the state pension?
The age at which you can claim the state pension has been rising, to keep up with longer lifespans. It's now 66, but between 2026 and 2028 the State Pension Age (SPA) will rise to 67, then to 68 over a two-year period starting in 2037. In the late 2040s, it will probably rise to 69. You can check your state pension age here.
If you're young, don't count on the current pension ages, they are reviewed every five years.
Question 4: Is there any benefit to delaying claiming a state pension?
If you can afford to defer taking the state pension, the amount you get when you do claim will be increased by 1 per cent for every nine weeks you wait. This equates to around 5.8 per cent for one year. Someone who is entitled to £175 a week in state pension but defers for 1 year would then receive around £10 more per week. You would need to live for around 17 years to make up for the year’s lost income. However if you are still working when you reach state retirement age, not claiming the state pension could mean you avoid falling into a higher-rate tax band. If you defer for at least a year you can also collect the missed payments as a lump sum.
Question 5: Will my state pension increase every year?
It is important that over time your pension income increases in line with rising prices. The triple lock is a government guarantee that the state pension will rise by the higher of three measures each year: these are 2.5 per cent, the rise in National Average Earnings and the Consumer Prices Index.
Beware: the triple lock however is not enshrined in legislation and could be removed.
Question 6: How can I plan my retirement finances?
Many parents will remember writing a birth plan for their children. You (and your partner) could do something similar for retirement, focusing on what you want to do and how you will pay for it. Write down your likely expenditure, and expected income. Divide your spending list into essentials and luxuries. Can your state pension cover the first list? The Citizens Advice Bureau has a budgeting tool which can help you to calculate your changing income needs.
If you hope to leave some of your wealth to your children, think about how you might do this in a tax-efficient way. Pension pots can be passed down free of inheritance tax.
Question 7: How safe is my pension?
A pension pot that is being looked after by a big insurance company or held in a Sipp nominee account is ringfenced from the provider's own assets so even if they go bust, your money will remain safe. However people transferring their pension pots into drawdown or cash are often targeted by scammers – many people have lost their entire pensions savings with no way of getting it back or even claiming compensation.
Don't be one of the people who loses an average of £91,000 per year through pension scams. Become 'scam smart' by checking out this handy guide from the FCA.
Question 8: How can I maximise the income from my pension pot?
How much pension income you get from a defined-contribution plan depends on several things: how much you (and your employer) put in, how stock markets perform and how and when you access this pot. Try to maximise your contributions in the saving stage because your money will get a vital tax boost. When you are ready to draw the money out, delay accessing it until you really need to so it has a chance to keep growing inside a tax-free wrapper. When you are ready to start drawing an income, moving your pot into drawdown means your funds will stay invested for as long as possible, which will help your overall payout, but it is important to keep an eye on charges, and fees if you pay someone to manage your pot.